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Why creditor lawsuits often lead to people filing for bankruptcy

On Behalf of | Jan 9, 2024 | Bankruptcy |

Lenders like credit card companies often become frustrated when people fail to make payments. Many financial businesses have in-house collection departments that may begin repeatedly contacting someone who has missed payments. Others hire professional collection agencies to pursue debtors.

Collection agents may send intimidating letters and repeatedly call people at home or their place of employment to convince them that they need to make payments as soon as possible. Someone struggling with a sudden increase in their financial obligations or a recent loss of income may not be able to bring their accounts back into good standing as quickly as creditors or collectors would like.

Businesses may then file a lawsuit in an attempt to collect on a debt. Those facing creditor lawsuits may choose to file for bankruptcy to protect themselves from litigation.

What creditor lawsuits could do

Ignoring a lawsuit brought by a creditor could be a dire financial mistake. The courts rarely care what someone’s reasoning is for falling behind on payments. Their main concern is the standing of the account and the validity of the debt.

A judge might rule in favor of the creditor plaintiff even when someone has a perfectly reasonable explanation for why they have missed payments. Those lawsuits could then lead to a lien against that person’s property or wage garnishment. Bankruptcy is one of the most effective ways to respond to a creditor lawsuit because of the automatic stay it provides.

How bankruptcy can help

When someone files for bankruptcy, the courts do not yet know whether they actually qualify for a discharge or not. The process often takes months to resolve, and the courts typically prevent creditor action until they dismiss someone’s bankruptcy or grant them a discharge.

When someone files for bankruptcy, all collection activity needs to stop due to the automatic stay. Not only do creditors need to cease calling someone and sending them letters, but they also need to dismiss their pending lawsuits. Someone likely to lose in a court case with a creditor can delay litigation by filing for bankruptcy.

They can then potentially discharge their debts if they succeed. Bankruptcy could also help them renegotiate their financial obligations with their creditors and change their household budget to better cover their financial responsibilities. Given that a creditor lawsuit could significantly worsen someone’s existing financial struggles, seeking ways to avoid a judgment is often in someone’s best interests.

Learning more about what happens during the bankruptcy process may help people decide if they need to file to protect themselves financially.