Lawsuit Defendants and Bankruptcy Filing

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Lawsuit Defendants and Bankruptcy Filing

Practical insights from powerhouse attorney, author and speaker Bradley Bailyn.


Maybe you were expecting it, maybe it was a surprise, but now it’s a definite fact: you’ve been served with a summons and complaint.  You are being sued. Besides the negative emotions this generates, a lawsuit in which you are named as a defendant also gives rise to an important question.

Do you defend the suit at what might potentially cost a significant amount of legal fees, or do you file for bankruptcy to escape the lawsuit and those large potential fees?

The answer is, as usual in law, it depends.  It always depends upon your individual circumstances.

First of all, where are you being sued?  In what court has the action been instituted?  If we are talking about a small claims action against you, the quick answer is, no, don’t contemplate a bankruptcy filing.

Remember at the time of this posting, the maximum amount you can be sued for in small claims court is $5,000.00.  This should not be “the straw that broke the camel’s back” when it comes to a decision as to whether or not to file for bankruptcy.  It’s just too small a potential judgment, and be mindful of the fact that it is a potential judgment.  You might be able to successfully defend against the claim by yourself—no lawyer needed.

Now if you find yourself in the Civil Court of New York City, the potential judgment maximum against you is up to $25,000.00.  If you find yourself in the Supreme Court of one of the boroughs, there is no maximum for which you may be sued.

If you find yourself having to defend a case in the above two courts, the question of defend the action or file for bankruptcy becomes more viable.  It might even require an answer, a decision.

If the filing of a petition in bankruptcy does become the preferred answer, and that is a question that becomes increasingly important the closer you get to trial, there are many considerations that must be made, prior to making that decision.

This, by the way, is not a decision for you to make alone.  You absolutely need experienced counsel in the fields of bankruptcy and commercial litigation to guide you along the proper path.

Both the areas of commercial litigation and bankruptcy are complicated and constantly evolving fields of law, either by the creation of new statutes, or by new cases interpreting already existing statutes.  You are not going to know the substantive and procedural law in these fields, because it is not your field of expertise.

Obviously, if it were within your expertise, you would not be reading this post.

Depending upon the strength of the action against you in which you are a defendant, and the motivation and endurance of the plaintiff, it might be possible to initially move forward with an aggressive defense posture and either, quickly settle the case for an affordable amount at affordable terms, or perhaps even get the case either dismissed or voluntarily discontinued by the plaintiff.

What do we mean by an “aggressive defense posture?”  

Imagine if you will, that instead of the default the plaintiff was expecting, or the begging for mercy from an unrepresented defendant, the plaintiff and his lawyer are immediately hit back with a detailed defensive pleading, multiple counterclaims against the plaintiff which might result in a judgment against him, and extensive discovery demands for documentary, electronic and testimonial evidence.

If the case is weak, or if the pot of legal fee gold available to the plaintiff’s lawyer is not full enough, it is definitely possible that this lawsuit against you might settle quickly at terms you can live with—without filing a bankruptcy petition.

An experienced attorney can counter punch a plaintiff with a strong defense initially, at a reasonable expense.  You can’t do it, you don’t know how, but he can, and it can be surprisingly affordable.

At this point it is time to learn an important legal fact in the field of bankruptcy:  there are different types of creditors who get different payment priorities from a bankruptcy estate.  A secured creditor who is owed a definite amount—a mortgage company or a car loan company for example, that has the house or the car as collateral for the loan—is going to get priority when it comes to divvying up the bankruptcy “pot of gold.”

An unsecured creditor owed an unliquidated amount is going to be at the bottom of the bankruptcy feeding trough.  By “unliquidated” we mean a claim that has not definitely been determined as to the amount which may be due and owing.

If you are going to file a bankruptcy proceeding during the pendency of litigation against you, you must file it prior to a verdict, prior to an exact determination of who owes what to whom.  You must do this so that the creditor’s claim remains unliquidated at the time of filing.

(There are certain special types of claims, like domestic support obligations for example, that do enjoy a special priority treatment in a bankruptcy, but for the purposes of this article, we are talking a commercial lawsuit against you, a breach of contract or failure to make payments type of situation in which you will most likely find yourself).

Remember, once a petition is filed, the court having jurisdiction over the pending lawsuit is immediately stopped from proceeding further.  If the plaintiff tries to continue his legal action post filing, he is subject to being in contempt of the bankruptcy court. Not a good thing to happen to a plaintiff.

One of the important considerations for you when contemplating bankruptcy, is for which form of bankruptcy do you file?  If you are individually sued, should you file for a Chapter 7 liquidation, or a Chapter 13 “wage earners” repayment plan? If you are a business, do you file a Chapter 11 proceeding so you can continue your business while the bankruptcy proceedings continue and a repayment plan is submitted and considered by creditors and the court?

The answer to those questions, especially for an individual defendant, is dependent upon the assets you have.  Certain property exemptions exist where a bankruptcy petition will not force the liquidation of those properties or equity positions in property.  You’ll retain them and still be discharged from those debts in a bankruptcy proceeding that are dischargeable.

Do you have sufficient income and assets where filing a Chapter 13 proceeding makes more sense—where there is a court ordered repayment plan and schedule to compensate your creditors?

Again, this business about property exemptions and the likelihood of a court approval of a repayment plan is complicated, subject to many complex legal determinations.  You are not in a position without competent counsel to make these determinations.

There are bankruptcy laws that would surprise you.  Sometimes payments that you have made within a certain time period before filing a petition can cause those payments to be “clawed back” by the bankruptcy trustee and put back into your bankruptcy estate—the amount of assets available to compensate creditors.  

These payments are called preferences.  Do you know about them?  Likely not, but your attorney will in his consultation with you find out all the necessary information to properly inform you as to your best course of action when you find yourself a defendant in a civil suit.

Be aware that there are certain causes of action where you cannot get a discharge from the bankruptcy court.  Be more aware that your attorney will be able to determine from the pleadings of the plaintiff’s case whether or not there may be certain causes of action which if not successfully defended against, may not be successfully derailed by a bankruptcy filing.

So many things for you to consider, but the most important thing for you to consider is this: you know your business or your profession, you know the proper actions and timing with respect to what it is you do.

That most certainly isn’t the case when considering the question of defend or file  for bankruptcy, and you need to immediately contact an experienced attorney that can answer all of your questions, and make sure that all of your legal rights are protected.

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Bradley R. Bailyn, Esq. , Founder

Bradley R. Bailyn, Esq., is a New York City-based attorney, author and speaker with practice area expertise in commercial real estate and bankruptcy law. Prior to founding The Bailyn Law Firm, Mr. Bailyn served as in-house counsel for multiple companies, where he advised on all legal aspects of major business and financial transactions including private equity, spin-offs, real estate, and restructuring transactions, for more than thirteen years.

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