Understanding Legal Steps Before Bankruptcy: Avoiding Common Pitfalls

This topic focuses on a key problem before bankruptcy: handling a creditor lawsuit. Even though filing for bankruptcy triggers the automatic stay that stops most lawsuits, there are still recommended legal steps you should take.

Merely filing the bankruptcy petition is insufficient; a formal Suggestion of Bankruptcy must be filed in the state court action to properly notify all parties. This extra step is essential to prevent immediate creditor actions, such as wage garnishment, bank account freezes, and the placement of property liens.

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

Updated on November 27, 2025.

Listen: The Professor’s Audio Briefing.

The Strategy of Responding to a Creditor Lawsuit Before Filing Bankruptcy

The decision of when to file for bankruptcy is often dictated by the specifics of your case. If filing for bankruptcy immediately is not possible, whether due to a lack of funds for retaining a bankruptcy attorney or other strategic reasons, the debtor must effectively handle the pending civil lawsuit.

A common pitfall is the belief that merely contacting the creditor will halt the legal proceedings. This is rarely successful; creditors are generally obligated to pursue their claims until a court order dictates otherwise or a formal agreement is executed. If proactive steps are not taken, the debtor is at risk of a bank account freeze, wage garnishment, or liens on personal property, including real estate.

I. Filing a Timely Response

The initial and most critical step in a civil action is to file a formal Answer or Response to the creditor’s Complaint. This is a procedural maneuver that:

1. Admits or denies the specific factual allegations contained within the complaint.
2. Preserves Defenses or list affirmative defenses that might otherwise be waived.
3. Contests the Case: This officially moves the lawsuit into the “litigated” or “contested” phase.

A defendant may also consider filing a Counter-Complaint if grounds exist.

II. Utilizing the Discovery and Settlement Processes

Contesting the case triggers the Discovery phase, which involves the mandatory exchange of relevant financial documents on both sides, for example, bank statements, contracts, and pay stubs. While time-consuming, the discovery process, along with subsequent hearings like a Pretrial Conference or Mediation, results in a delay in the case.

During this time, a debtor can reach a temporary settlement with the creditor, hopefully with minimal payments. This results in valuable time gained by the debtor. For example, negotiating a monthly payment of $100 per pay period or month could be significantly less than a wage garnishment, which typically ranges from 15% to 25% of disposable earnings.

Professor’s Note: The creditor or attorney for the creditors sometimes claims that the settlement reached in the debt collection lawsuit is non-dischargeable in bankruptcy. This is false! They are hoping the debtor excludes the debt from the bankruptcy petition, which sometimes results in that debt being non-dischargeable.

The agreement is a debt that is an unsecured claim that can be discharged in a Chapter 7 or Chapter 13 bankruptcy filing.

III. Strategic Delay and Case Management

In jurisdictions where the litigation calendar is heavily backlogged, contesting the case can strategically delay the entry of a final judgment. For example, in high-volume jurisdictions like Miami, Florida, it is not uncommon for a contested credit card lawsuit could take two to three years to reach a trial hearing. This can create the necessary “time” for the debtor to retain a bankruptcy attorney and begin the process of filing for bankruptcy.

The Automatic Stay and the Suggestion of Bankruptcy

Once the Chapter 7 or Chapter 13 bankruptcy petition is filed with the U.S. Bankruptcy Court, the Automatic Stay, §362 of the Bankruptcy Code, immediately takes effect. This injunction prevents most creditors from initiating or continuing collection actions, including nearly all civil lawsuits, wage garnishments, and foreclosure actions.

Wages Garnished After Filing Bankruptcy? It’s an Illegal Automatic Stay Violation. Here’s Your 3-Step Legal Fix.

Professor’s Note: It is important to note that the automatic stay does not affect all legal proceedings. For example, criminal cases and actions for domestic support obligations (alimony and child support) are generally unaffected and may proceed in their respective courts.

The Requirement of the Suggestion of Bankruptcy

The automatic stay is effective immediately upon filing; however, the state court and the involved parties may not receive notice immediately. To ensure that the creditor takes no further steps pending the bankruptcy, it is essential to file in civil court a Suggestion of Bankruptcy.

1. Obtaining the Document: The Suggestion of Bankruptcy is an official notice form obtained from the federal court system. The debtor or their attorney can retrieve it from the docket of the bankruptcy case, typically accessed via Pacer.gov (the Public Access to Court Electronic Records system).
2. Filing and Service: The Suggestion of Bankruptcy must be formally filed in the specific state or local civil lawsuit. This puts the civil court judge, the creditor, and their counsel on formal notice of the federal bankruptcy filing and the resulting automatic stay.

Professor’s Note: If a creditor continues a garnishment action after the bankruptcy filing but before the Suggestion of Bankruptcy is filed in the civil court, the funds taken must be returned.

However, pursuing this reimbursement will take significant effort, time, and litigation expense, but by filing the Suggestion of Bankruptcy, it is a proactive step to prevent the creditor from doing so. It also substantially reduces time and money in having the funds returned.

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 also listen to my podcast on Spotify.

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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