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Why a creditor lawsuit is a common reason to file for bankruptcy

On Behalf of | May 17, 2024 | Bankruptcy

Every bankruptcy case is unique. People owe different debts and experience financial hardship for unique and personal reasons. Job loss, medical issues and divorce are all among the commonly-cited reasons that people eventually file for personal bankruptcy.

However, many people find themselves pushed into making the decision to file because of the same concern. Specifically, when a creditor decides to file a lawsuit against them, they realize that they have to take aggressive action to resolve their financial obligations. Receiving legal service for an impending creditor lawsuit is often the experience that makes people realize that they can no longer delay filing for bankruptcy a moment longer.

Why creditor lawsuits are so intimidating

People are right to act quickly when a creditor threatens to take legal action. The failure to respond to the lawsuit leads to the courts issuing a default judgment in favor of the creditor. Even if the person who owes money does respond, the chances of the creditor prevailing in court are quite high.

Judges rarely take into consideration why someone has fallen behind on their debts. The only factors that really matter in such lawsuits are generally the validity of the debt and whether someone has verifiably defaulted from the payment arrangements made with the creditor or lender.

Creditor judgments can lead to liens against high-value assets, including someone’s home. Pursuing real estate liens is a common tactic used by medical creditors, for example. Creditors can also sometimes ask the courts to garnish someone’s wages. An individual already struggling with financial obligations could end up completely overwhelmed if a garnishment reduces their disposable income.

How bankruptcy can help

A creditor lawsuit is a stressful experience, but someone who files for personal bankruptcy can avoid the need to appear in court. If someone submits their initial paperwork before they have a hearing for their creditor lawsuit, the automatic stay from their bankruptcy case usually makes it necessary for the creditor to dismiss the lawsuit. Provided that the debt is eligible and that the filer takes the right steps, they can potentially discharge the debt that caused the lawsuit, thereby eliminating the possibility of the creditor taking legal action against them again in the future.

People who understand the impact a creditor lawsuit could have may take action by filing for bankruptcy to protect their finances. Filing a personal bankruptcy could help someone avoid the worst possible consequences, including wage garnishment and property loss.