Is it ever too late to file a bankruptcy case?

The short answer is:  No, it is never too late.

But there can be consequences to waiting.

Most people wait until the last possible moment before considering bankruptcy as an option.

They make decisions and act, or fail to act, without getting all the necessary information.

The longer they wait, the more options disappear and the more problems arise.

As I discussed in my article on When You Should File Bankruptcy,  it is always better to consider your bankruptcy and non-bankruptcy options earlier, rather than later.

Doing so enables you to minimize the costs and problems, and maximize the benefits of filing a bankruptcy (or, not filing).

However, as long as you are eligible to file under one of the bankruptcy chapters, you can still eliminate or restructure debts that are owed after a lawsuit is filed and even after a judgment has been entered against you.

The fact that there is a lawsuit or judgment does not affect affect your bankruptcy options, unless the judgement had a finding of fraud or other element that is excepted from discharge in bankruptcy (see more below).

It is, nevertheless, usually best to file bankruptcy before a judgment is entered.  Because once that occurs, the creditor can garnish wages or seize bank account funds up until a bankruptcy case is filed.

The creditor can also then place a lien against property, which may or may not be removable in bankruptcy. [See my article on removing judgment liens in bankruptcy].

Not All Debts Are Dischargeable

In general, it is best to file a bankruptcy case before a judgment is entered after a lawsuit.  Usually, if a lawsuit has been filed or a judgment has been entered against you, it does not change whether you can discharge that debt in bankruptcy.

But not all debts can be discharged in bankruptcy.   For example, child support and alimony are not.  Neither are student loans, debts incurred through fraud, and many others.

Thus there may be a risk of a judge making specific findings of fact that could render your debt non-dischargeable in a bankruptcy case, so you want to be very careful if you are letting a judgment be entered  prior to filing a bankruptcy case.

See more on which debts can be discharged in bankruptcy.

What Are Lawsuits and Judgments?

A lawsuit is simply a way for a creditor (someone who thinks they are owed money) to get a court to issue an order (“Judgment”) that says the money is owed to the creditor, and the amount.

The Judgment, in turn, gives the creditor the ability to try to collect the debt by whatever means are allowed pursuant to applicable state law.

In California, this includes wage garnishment, seizing funds in bank accounts, and placing a lien against real estate and other assets.

So, it is obviously best to file a bankruptcy case (if one is to be filed) before a judgment is entered on the lawsuit.

Should I Respond to the Lawsuit?

Whether one should respond to a debt collection lawsuit really depends on the specific facts and circumstances of their case.  For example, if the debtor in question has very little assets and no job, then they don’t need to worry too much about a judgment causing immediate problems.

But if they have real estate or a job, it could cause some temporary discomfort if the creditor pursues a wage garnishment or bank account levy.

If they record a lien against your real estate, that can also be a problem which can usually be remedied in a bankruptcy case, but removing the lien will require additional fees and steps.

In most cases, responding to the lawsuit (filing an “Answer”) will buy time necessary to get the bankruptcy case prepared and filed.

And, of course, if you do not actually owe the money, it will give you the opportunity to explain that and prevent the creditor from collecting against you.

Always Consult With a Qualified Bankruptcy Attorney

The optimal strategy and means to deal with a lawsuit and take advantage of your bankruptcy options is to have a consultation with a bankruptcy attorney in your area.

Don’t let time run out on your options.

Image Courtesy of John Morgan