How Bankruptcy Impacts Lawsuits in Different States
What happens if you live in one state and are being sued in another? The automatic stay, a powerful weapon against creditors, effectively stops most cases, giving you time to prepare financially for your next move. This blog post will break down the automatic stay’s reach with one reader facing a car accident lawsuit in another state as Chapter 7 bankruptcy will be filed.
Listen to this blog.
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.
Today’s question comes from Andy, who was planning on filing for bankruptcy but is now concerned about a lawsuit that was filed against him.
Andy resides in Birmingham, Alabama, but the lawsuit was filed in Bennington, Vermont. Andy is being sued for a car accident for which he was at fault. The car accident occurred while visiting family and attending a friend’s wedding.
Andy’s concern is because he is filing for bankruptcy in Alabama, how, if at all, will it affect the car lawsuit in Vermont?
Factual Background
Andy had already met with a local bankruptcy attorney who confirmed he qualified for Chapter 7 bankruptcy. Andy was employed full-time, but his employer reduced his hours to part-time. The loss of income caused Andy to fall behind on his credit cards.
The insurance company of the driver Andy crashed into filed the lawsuit. Andy’s concern is that if he lives in Alabama, what will happen to the lawsuit in Vermont, and will the automatic stay have any effect?
What is the Automatic Stay in Bankruptcy
The automatic stay stops most lawsuits from moving forward. The automatic stay won’t stop all lawsuits, as discussed in prior posts. For example, criminal cases are unaffected by filing for bankruptcy. The same applies to cases related to family law where the issues are alimony or child support.
The Chapter 7 Bankruptcy is in Alabama, and the Car Accident Lawsuit is in Vermont
if Andy files for bankruptcy in Birmingham, will that affect the lawsuit in Vermont? Yes!
Federal law will always trump state law. This is known as the Supremacy Clause of the United States Constitution.
Article VI, Clause 2:
This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.
Overview of Supremacy Clause | Constitution Annotated | Congress.gov | Library of Congress
Federal law is known as the supreme law of the land, so it is superior to state law. Bankruptcy is federal law. There is no state bankruptcy law, although states under the Bankruptcy Code may apply their own exemptions instead of federal ones.
Because of this, when Andy files for Chapter 7 bankruptcy in Birmingham, the lawsuit will be stopped in Vermont. Andy only has to make sure that the insurance company is listed as a creditor in the bankruptcy petition so that they receive notice.
Because the lawsuit is a debt, the creditor will be listed on Schedule E/F: Creditors Who Have Unsecured Claims (individuals), Official Bankruptcy Form 106 E/F.
The insurance company will also be listed on the Statement of Financial Affairs for Individuals Filing for Bankruptcy, Official Bankruptcy Form B107 because the lawsuit occurred within the last two years.
But, one more step should be taken to ensure the lawsuit does not proceed.
Filing The Suggestion of Bankruptcy
Once the bankruptcy petition has been filed, a Notice of Filing for Bankruptcy should be filed with the clerk’s office where the lawsuit is pending. Via the bankruptcy clerk’s website, a Suggestion of Bankruptcy can be obtained, including the case information, and that is filed along with the Notice of Filing for Bankruptcy.
This should be done as soon as possible to avoid issues with wage garnishments, freezing of bank accounts, or having liens placed on personal property such as your car or home.
Do you have any questions you wish to post in the Reader’s Questions Forum? Then feel free to e-mail me at alex@bankruptcy.blog.
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Disclaimer: Bankruptcy.blog is for informational purposes only and does not constitute legal advice. Please consult with a qualified bankruptcy attorney to discuss your specific situation.
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