Attorneys generally specialize in specific areas of law, such as bankruptcy. In fact, a lawyer is normally required under the rules of professional responsibility to refer clients out when the client’s issue pertains to an area of law the attorney is not familiar with. In that case, what happens when a client’s issue spills into another area of law? this is a question we often have to ask ourselves in the bankruptcy context. There is almost always some sort of issue to make each case different, and often that issue is a pending legal proceeding outside of the bankruptcy context. This often forces bankruptcy attorneys to become familiar with other proceedings, and grants the attorney the experience necessary to see how a bankruptcy case may interact with an ongoing proceeding.
Types of Proceedings
One of the very first questions a bankruptcy attorney should be asking a prospective client is “Are there any ongoing proceedings that you are a party to?” An ongoing proceeding means a lawsuit in which the debtor would be a named defendant. If the debtor is being sued or suing another party, they need to disclose that information to their attorney, who in turn needs to disclose it to the bankruptcy court. Thiscould include an ongoing divorce case, personal injury, or any other type of litigation.
While it will not necessarily prohibit a debtor from filing for bankruptcy, it is important to know that the debtor may be liable to another party. This is a claim against the debtor and, in turn, may take assets or funds away from the bankruptcy estate. This affects the case in that it may change the amount the creditors will actually receive. This makes it crucial to know as early as possible in the beginning steps of the bankruptcy whether there is any ongoing litigation.
Divorce
Divorce is one of the most frequently cited reasons for individuals to file for bankruptcy. The divorce process is a lengthy and expensive one, and both sides of the divorce often come out of the process with less than they expected. Divorce is one of the most common expenses someone going through bankruptcy experiences, as the proceedings may take long enough to force a married party to file for bankruptcy.
One key takeaway from divorce actions that occur either prior to or during a bankruptcy proceeding, the debt incurred from the former spouse is generally not dischargeable. Whether it is alimony or child support, a debtor generally cannot discharge debts to a former spouse that were ordered by the divorce court.
Often a part of the divorce process is litigating which debts should belong to each spouse. Normally, when one spouse takes on debts that belong to both spouses, the other spouse is still legally responsible for the debt. The non-responsible spouse would just have a claim against the responsible spouse for the amount owed. This holds true even if the responsible spouse files for bankruptcy. While the obligation to the creditor may be discharged, the obligation to the former spouse is not. This is considered spousal support, and is not dischargeable.
Personal Injury
Over the course of a three or five-year chapter 13 plan, or even the pendency of a 90 day chapter 7, life happens. A person may slip and fall in a grocery store, or get into a car accident. These are claims that a debtor may have against someone else, and can often bring a large sum of money into the bankruptcy estate. These cases need to be disclosed and, if above any statutory exemptions, the amount collected would likely be paid to creditors once it enters the bankruptcy estate.
Litigation Issues
In cases where a defendant files for bankruptcy, any efforts to collect on pre-petition debts must cease due to the automatic stay. This includes ongoing litigation. Regardless of what stage in the process a plaintiff may be, the plaintiff needs to cease any attempts at pursuing either the litigation or the post-judgment collections against a defendant who has filed for bankruptcy. Failing to do so may result in a violation of the automatic stay which, in turn, may result in the plaintiff owing fees to the defendant. A plaintiff must be careful when pursuing their claim.
A creditor who believes their claim falls outside of the purview of the bankruptcy court may file a motion to lift the automatic stay. If a court grants this motion, the plaintiff may continue to pursue the debts, regardless of the ongoing bankruptcy case.
Bankruptcy Abuse
While the automatic stay provisions in the bankruptcy code are strong, a defendant must also be careful. Fraudulent use of the bankruptcy code to stall debt collections are also a major violation of the bankruptcy code. If a court finds that a bankruptcy was fraudulently filed, the case is liable for dismissal, with the debtor being unable to file again for an amount of time determined by the court. This means that if a debtor files fraudulently, they run the risk of not being able to file if and when they actually need thesafeguard provisions of the bankruptcy code.
Adversary Proceedings
In very specific cases, a creditor with a claim against a debtor may file an adversary proceeding. Often these proceedings are filed to seek something called “non-dischargeability.” The creditors in these cases allege that their debts should not be discharged in the bankruptcy case. Normally, this occurs when thecreditor has a claim against a debtor for a fraud related action. If a creditor is successful in their non-dischargeability action, they still need to pursue the debtor in another court to see if the debtor is actually liable for the alleged fraud.
