Can Creditors Sue During Bankruptcy?
The automatic bankruptcy stay is a powerful legal tool designed to protect Colorado bankruptcy petitioners from new and continuing debt collection and civil lawsuits. Creditors who willfully violate the automatic bankruptcy stay can be fined and ordered to pay the debtor damages, including attorney’s fees and possibly punitive awards.
However, there are limited exceptions to the automatic stay that allow certain creditors to sue a debtor during bankruptcy proceedings. You should never file a lawsuit if you know the debtor is in bankruptcy without speaking with the dedicated Colorado creditors’ rights lawyers at Brown Dunning Fein Drusch PC.
Scope of the Automatic Bankruptcy Stay
Once debtors petition for bankruptcy, the automatic stay immediately takes effect. It stops nearly all civil litigation against the debtor or the debtor’s property. However, it only applies to pending lawsuits, debts that arose before the bankruptcy case commenced, or cases that could have been filed before the bankruptcy petition. It does not generally apply to debts and liabilities incurred after the petition date.
Filing a Motion to Lift the Stay or Adversarial Proceedings in Colorado
The only way to lift the automatic stay is through a ‘motion for relief from the stay’ filed with the bankruptcy judge. To qualify for relief, creditors must show cause under 11 U.S.C. § 362. The most common reasons creditors obtain relief include the following:
- Debtor’s failure to make Chapter 13 payments
- Lack of adequate protection for secured creditors (decline in property value)
- Abuse of process
- Non-compliance
Creditors may also consult dedicated bankruptcy defense attorneys to seek dismissal of the petition if the debtor filed the case in bad faith or failed to comply with legal requirements and court orders. Lenders also have the option of filing adversarial proceedings within the bankruptcy case – rather than new lawsuits – which can include discharge objections, fraudulent transfer allegations, and questions regarding lien validity.
Exceptions for Non-Dischargeable and Post-Petition Debts
The automatic stay does not apply to certain debts. Creditors with non-dischargeable debts, such as child support and alimony arrears, as well as certain tax creditors, can still sue for relief even during bankruptcy proceedings. Certain government and regulatory creditors, including prosecutors seeking restitution, can also sue while the debtor is in bankruptcy.
Importantly, the stay does not apply to post-petition creditors. These are creditors who extend credit to the debtor after the debtor files the bankruptcy petition. Post-petition creditors can still sue on these debts during Colorado bankruptcy proceedings. Creditors also retain the right to sue co-signers, business partners, and other liable third parties for the debt, leaving these co-debtors to seek relief and indemnification.
Colorado Creditor’s Rights Attorneys
If you need to sue while a debtor is in bankruptcy, discuss whether you have a qualifying debt or can file a motion to lift the stay with our experienced creditors’ rights litigators today. Call (303) 239-3363 or contact our Colorado business and finance attorneys online.