A bankruptcy lawsuit is either of two types of proceedings in a bankruptcy court. The first type of proceeding that this term refers to is one in which a debtor files for personal or corporate bankruptcy in order to seek relief from judgments or other debt. Within this type of proceeding, an additional bankruptcy lawsuit called an adversary proceeding can be filed by one party to the bankruptcy against another party to the bankruptcy. For example, a creditor can file an adversary proceeding in order to have a specific debt declared non-dischargeable. A debtor can file an adversary proceeding against a creditor to have a lien declared invalid.
A bankruptcy lawsuit of the first type is usually referred to simply as "filing bankruptcy," because the debtor typically is not suing anyone but is seeking relief from mounting debt under the law. Bankruptcy allows individuals and corporations a second chance to get and keep their finances in order by discharging all unsecured debts, with certain exceptions. This means the debts no longer exist and the creditors cannot take any action against the debtor to attempt to collect the debts.
There are three main types of bankruptcy. Chapter 7 bankruptcy is when all unsecured debts are discharged, and any property that the debtor cannot afford to continue to pay for through a reaffirmation of the debt must be returned to the lien holder. Any debts not reaffirmed are discharged. Many people file Chapter 7 bankruptcy to get out of credit card debt or to avoid having a judgment issued against them or paying a judgment already issued.
Chapter 13 bankruptcy is filed when a debtor reorganizes his debt, paying through the bankruptcy court all of his secured debt and any portion of unsecured debt the bankruptcy court deems his budget will allow. A proposed plan is filed with the court, and once approved, the debtor makes a monthly payment over the course of several years to pay back payments on secured debts and part of monies due on unsecured debt. Filing a Chapter 13 bankruptcy will allow a debtor to keep property that is attached to a secured loan, even if they are behind. For example, for someone who was unemployed and fell behind on mortgage or car payments a Chapter 13 would allow them to repay the back payments over a period of three to five years through bankruptcy while also paying the regular payments as normal.
For corporations or individuals with debts larger than what is allowed in the filing of a Chapter 13, Chapter 11 reorganization offers the same protections and responsibilities as a Chapter 13 but on a much larger scale. Chapter 11 bankruptcy cases generally are filed by corporations that have more debt than they can manage, or that have or are in danger of having a legal judgment entered against them. Through bankruptcy, these debts can be satisfied over a longer period of time or even reduced by the court.
An automatic stay that is imposed upon the filing of every bankruptcy prohibits creditors from contacting the debtor, suing the debtor or taking any action whatsoever against debtor to collect payment or property during the course of the bankruptcy lawsuit. It also demands that the debtor not seek out or enter into any other credit agreements during the course of the bankruptcy. As all legal proceedings outside of bankruptcy court must stop immediately, many debtors file bankruptcy in an effort to stop a foreclosure or repossession. The automatic stay often buys the debtor enough extra time to catch up the amount owed so that the debt can be reaffirmed or placed into a Chapter 13 reorganization, allowing the property to remain with the debtor. Violation of the automatic stay can be costly for both the debtor and creditor, through dismissal of the bankruptcy, dismissal of the debt or heavy fines.
The term "bankruptcy lawsuit" also can refer to the filing of an adversary proceeding within a bankruptcy. An adversary proceeding is a lawsuit filed within a bankruptcy case that seeks relief of some sort from the bankruptcy court. Creditors file adversary proceedings to seek to prove that the debt owed to them is not dischargeable through bankruptcy or to request leave to continue with a foreclosure or repossession prior to the discharge or dismissal of the proceedings. Debtors can file an adversary proceeding to force the return of repossessed property, have a lien declared invalid or seek to discharge a debt that is not dischargeable on its face. This type of case is a lawsuit within the bankruptcy and often gives leave for legal proceedings outside the bankruptcy despite the automatic stay.