Lawsuits can merely be a nuisance for many companies and a cost of doing business. For individuals, they may be considered just an inconvenience if they have few assets to lose. If you have been sued for a business debt or other matter and face considerable exposure and asset losses should your defenses in a lawsuit, if any, are unsuccessful, you might contemplate filing bankruptcy. Before you do, you should think about the consequences of doing so and if you are indeed judgment proof.
Some people file for bankruptcy shortly after they are sued, especially if they are aware of their substantial obligation for the debt. An example is if you are sued for causing injuries in a car accident and liability is undisputable. Should insurance coverage be either inadequate or nonexistent, then filing bankruptcy might be an option for you. Also, if you are uninsured or underinsured in this case, the plaintiff can choose in many states to waive uninsured motorist coverage and pursue a cause of action against you directly. The uninsured provider can also sue you for reimbursement.
Benefits of a Bankruptcy
Filing bankruptcy does protect most if not all of your assets from seizure. You are entitled to certain exemptions under state or federal law, depending on the state where you file. For example, some states have an unlimited exemption for household equity while others are very low. If your state allows you to choose the federal exemptions, you can protect up to $22,975 or $45,950 if married and filing jointly. Under either the state or federal exemptions, you can exempt other personal property to certain amounts including one car, tools of the trade, a retirement account, jewelry, clothes and furniture, and other assets.
The automatic stay provision in a bankruptcy also prohibits any further collection activities such as levies or garnishments, including pending or ongoing civil litigation, unless the other party can get relief from the bankruptcy court. Unsecured debts such as credit cards, medical expenses, lines of credit and non-collateralized loans are discharged when your case is completed under Chapter 7. If the car accident injury lawsuit against you was caused by negligence on your part, such as by running a stop sign or an illegal lane change, then any judgment will be discharged as unsecured debt.
Are You Judgment-Proof?
Contrary to popular belief, you may not be judgment proof after losing a lawsuit and then filing for bankruptcy. If you caused another party’s car accident injuries from being intoxicated or by driving 100 miles an hour on a city street for instance, your conduct could be construed as grossly negligent or which displayed a gross indifference to the rights and safety of others. In this case, you could be subject to punitive damages. The claimant or plaintiff would have to allege in civil litigation bankruptcy that the damages incurred were because of your gross negligence so that your personal assets are now at risk of seizure.
Also, if you were found guilty of fraud or misrepresentation, or any other intentional criminal act, then your assets are not exempt and you cannot claim the judgment as an unsecured debt.
You should also consider that not all your assets will be exempt even if you were merely negligent. If you have a second home or second car, it is not exempt. If you have equity in your home that is less than what you are permitted to claim under your state’s law, the trustee can seize your home and sell it off.
Even if you do have these exemptions available to protect your assets, do not wait too long to file to have the benefit of the automatic stay. A creditor may act quickly to seize certain assets of yours before you file. While you might be able to recover some of your seized assets, it is no guarantee you can get all of it back.
In situations where you are incorporated and the suit is against you and the corporation, your personal assets are generally not subject to the suit if the judgment is solely against the corporation. The purpose of incorporating is to protect your personal assets in a lawsuit involving corporate transactions. However, not all individuals, such as directors and officers who run corporations, follow corporate protocol. If your corporation failed to act as one such as by comingling funds, a creditor in a civil litigation bankruptcy action can assert the principle of “piercing the corporate veil” by showing that you did not follow corporate rules and regulations so that the corporate assets are now personal ones and subject to seizure to pay a judgment.
Before filing for bankruptcy under any circumstances, consult a bankruptcy attorney to discuss your legal options and to weigh the benefits of filing.