Does Declaring Bankruptcy Eliminate Money Owed If Being Sued By Another Person?

Written by James Hirby | Fact checked by The Law Dictionary staff |  

With few exceptions, declaring bankruptcy will absolve you of your responsibility to pay off your outstanding unsecured debts in full. These may include credit card balances, personal lines of credit, certain types of business loans, medical bills, and other forms of credit that can't be tied to a specific tangible asset. In most cases, liabilities resulting from prior lawsuit judgments also qualify as unsecured assets.

If you're in the process of being sued by an individual, declaring bankruptcy may not absolve you of your liability for any potential judgment. Such lawsuits commonly occur after a vehicle accident for which you're deemed to be at fault. If you're found not to be carrying adequate insurance at the time of the accident, your counter-party may choose to sue you for the damage to their vehicle as well as any medical bills attributable to the crash. This is true even if they're carrying uninsured-motorist insurance: Many states allow insured parties to waive their right to coverage under this provision when they stand to earn more from a lawsuit.

Your post-bankruptcy liability for damages arising from such individual lawsuits will vary depending upon the laws of your jurisdiction and the preferences of your presiding judge. Only one rule is ironclad: If the police record of the incident indicates that you were under the influence of mind-altering substances or intended to harm your counter-party, your debt will not be eligible for discharge in bankruptcy.

On the other hand, you'll almost always be able to escape liability for lawsuits initiated by the unsecured creditors to whom you owe large amounts of money. In fact, declaring bankruptcy usually stops these sorts of lawsuits in their tracks. While your creditors may recover some of what you owe them during the bankruptcy process, they'll no longer be entitled to sue you for the full amount of your debts. If such a lawsuit has reached its conclusion and produced a judgment before your bankruptcy filing, it will be treated as just another unsecured debt that's eligible for discharge.

If you own a business, your bankruptcy filing will also negate any lawsuits or judgments arising from unpaid rents, supplier invoices and utility bills. Of course, you must return any materials that you received on credit from your suppliers. In addition, the utility provider that you stiffed may hold a grudge and demand a hefty upfront payment when you elect to restore your service.

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