I get this question a lot, and it is one of those questions that requires a little interpretation. I don’t think that anyone who calls and asks this question really believes that just because you have been named in a lawsuit means that you can never file for Bankruptcy, which is what the question asks. In reality there are three questions lurking here.
The first question fleshes out this way, “I’ve been sued over a debt I did not and could not pay. The Plaintiff has taken a judgment against me and recorded that judgment in County records. What exactly does all of that mean, and if I file for Bankruptcy now, what can a Bankruptcy do for me with respect to that judgment?”
Like with most things the answer to that question is going to vary from State to State, and I do not presume to discuss anything here other than Oklahoma State law. That being said, in Oklahoma a judgment gives the creditor certain rights, including the right to garnish wages, levy on bank accounts and record that judgment in County records. Once the judgment has been recorded, it creates a lien on any real estate owned by the Debtor in that County.
That isn’t nearly as bad as it sounds. First of all, there are some limits on wage garnishments. Bank levies are rarer for a variety of reasons, but what most callers asking this question are really concerned about is a judgment lien attaching to their house. Now, a judgment lien attaches to all real estate owned by the Debtor in the County, so if a Debtor owns a house that he lives in and another house — say a rental property, the lien will attach to both properties. That is significant, because in a Bankruptcy a judgment lien can be removed from homestead property, but it cannot be removed from real estate that you own and don’t live in. Also, a judgment lien cannot be foreclosed on homestead property (meaning the creditor can’t force a sale of the house to get its money), but it can be on property that the debtor owns but doesn’t live in.
Translated, this means that in a Bankruptcy a judgment lien can be removed from your home. If you own other property, it probably cannot be removed and will survive the bankruptcy.
Now, just because you’ve been sued, doesn’t mean a judgement has been taken against you. This is really the answer to the second question. The second question fleshes out like this, “I’ve just been sued. The lawsuit was filed a few days ago, and a process server just handed me the Petition and Summons. Does that mean that a judgment has been taken against me?” In a word, No. These things take time. A lawsuit generally ends with a judgment. it doesn’t start with one. However, filing a bankruptcy takes some time as well, so, calling an attorney sooner rather than later is always a good idea.
The third question is “I’ve just been sued. I owe the money. Can a bankruptcy filing stop the lawsuit, prevent a judgment from being entered and make sure that no wage garnishment will ultimately be served on my employer?”
The answer to that question is very simple. Yes. Lawsuits, wage garnishments and bank levies are all stopped by a bankruptcy filing. They are not stopped by your making an appointment with a bankruptcy lawyer, by your filling out forms or even by your paying the lawyer money. They are stopped when your Bankruptcy petition is uploaded to the Bankruptcy Court’s electronic filing system.
The minute that a Bankruptcy is filed an order issues automatically from the Bankruptcy Court that stays (meaning temporarily stops) all collection activity against the Debtor or property of the debtor. That means everything stops. The automatic stay is one of the really cool things about a bankruptcy filing.
So, is it too late? No. That does not mean that waiting any longer is a good idea. Getting the bankruptcy filed will take time, so be sure that you leave yourself the time you need to prevent the creditor suing you from causing you any unnecessary pain.