How Bankruptcy Impacts Lawsuits in Different States
When a debtor files for bankruptcy, the automatic stay immediately stops virtually all collection efforts, including lawsuits. But what happens when the bankruptcy is filed in one state (like Alabama) and the lawsuit is pending in another (like Vermont)? This scenario is surprisingly common and raises questions about jurisdiction at the state and federal levels.
As a published expert in consumer bankruptcy law, this post will clarify the powerful reach of the bankruptcy automatic stay. This post was based on a scenario a recent client of mine faced, which was filing a Chapter 7 bankruptcy in one state to stop a car accident lawsuit in a distant state.
By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).
Updated on November 25, 2025.
Listen: The Professor’s Audio Briefing..
Key Points:
- Chapter 7 bankruptcy is being filed in Alabama but the car accident lawsuit is in Vermont.
- Bankruptcy will trigger the automatic stay regardless of where a lawsuit is filed.
Bankruptcy Stops Lawsuits in Any Other State: How the Automatic Stay Works
Consider a situation where a debtor, residing in Alabama, prepares to file for Chapter 7 bankruptcy, but is facing a lawsuit from a car accident that occurred in Vermont. This lawsuit, filed by the opposing driver’s insurance company, puts the debtor in a difficult spot.
The core question is this: If the bankruptcy is filed in Alabama, how, if at all, will it affect the car lawsuit in Vermont?
The Automatic Stay: The location of the lawsuit is irrelevant to the automatic stay.
The Authority: The Supremacy Clause of the U.S. Constitution and the specific language of the Bankruptcy Code mandate the immediate halt of the lawsuit.
What is the Automatic Stay in Bankruptcy?
The automatic stay, codified in 11 U.S.C. §362 of the U.S. Bankruptcy Code, is arguably one of the most powerful features of bankruptcy. It operates automatically, without the need for a court order, upon the filing of the bankruptcy petition.
Federal Law vs. State Law: The Supremacy Clause
If the debtor files for bankruptcy in Alabama, will that affect the lawsuit in Vermont? Yes!
Federal law will always trump state law. This is the bedrock principle known as the Supremacy Clause of the United States Constitution.
Bankruptcy law is federal law, which makes it the supreme law of the land, making it superior to state law. This means that a federal court order or in the case of the automatic stay, a federal statute, must be honored by state courts nationwide, regardless of where the lawsuit was originally filed.
Because of the automatic stay, when a Chapter 7 bankruptcy is filed in Alabama, the out-of-state lawsuit in Vermont is immediately stopped.
The debtor only has to make sure that the insurance company (the creditor) is listed on the bankruptcy petition so that they receive official notice. The lawsuit, being a debt, must be listed on Schedule E/F: Creditors Who Have Unsecured Claims (individuals), Official Bankruptcy Form 106 E/F.
The lawsuit should also be listed on the Statement of Financial Affairs for Individuals Filing for Bankruptcy, Official Bankruptcy Form B107, especially if the lawsuit was filed within the last two years.
The Professor’s Take: Filing the Suggestion of Bankruptcy
While the automatic stay is effective immediately, from a practical matter, whether the case is in the same jurisdiction or in another state, notification is a key procedural step.
To ensure the state court judge and other party are aware of the stay and avoid any potential contempt issues for the creditor, the debtor’s attorney should file a Suggestion of Bankruptcy with the clerk’s office where the lawsuit is pending.
This step involves filing a Notice of Filing for Bankruptcy, along with relevant case information. While not required to initiate the stay, this extra step prevents delays or unintended actions, such as default judgments, wage garnishments, or liens, from proceeding due to lack of notice.
Professor Hernandez is an attorney specializing in consumer finance and debt relief. He is the published author of Consumer Bankruptcy Law (Routledge Publishing) and teaches law and finance courses in both English and Spanish for an international university.
Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. Paralegals and students who are buying single copies can do so via Amazon Books. To access my YouTube channel, click this link.
You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.
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Please note that the information on this site does not constitute legal advice and should be considered for informational purposes only.
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