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Why a creditor lawsuit can become a bankruptcy tipping point

On Behalf of | Mar 15, 2024 | Bankruptcy

When people fall behind on their debts or credit card payments, they generally assume that they can catch up with a stricter budget. It is common for people to slowly accumulate debt while trying to keep their budgets as balanced as possible.

Unexpected expenses or surprise drops in income can leave someone unable to pay all of their financial obligations every month. Many people continue trying to make payments to the best of their ability but may fall ever further behind, especially as interest and fees begin accruing. Eventually, someone may receive service with lawsuit documents from a lender or creditor. For many people, a creditor lawsuit is the last financial stressor that forces them to earnestly consider bankruptcy.

Creditor lawsuits can worsen a difficult situation

Someone already struggling to balance their budget could experience an abrupt, negative change in their finances following a creditor lawsuit. Unfortunately, debt-related lawsuits very often end in favor of the creditor.

Provided that the debt is valid and that the defendant has failed to make payments, courts give very little consideration to the reasoning behind that failure. Creditors can take action against someone’s property or potentially attempt to garnish their wages. Wage garnishment rules in Tennessee put individuals at a marked disadvantage and may leave them with even less income to allocate among their creditors every month.

It is very difficult to address existing garnishments and similar issues related to successful creditor lawsuits. Many people find that it is a much more effective solution to prevent the lawsuit from going to court. Someone who files your bankruptcy while facing a creditor lawsuit could avoid a wage garnishment or other judgment in favor of their creditor. The courts typically allow for the dismissal of pending creditor lawsuits once an individual files for personal bankruptcy.

Although the courts do sometimes grant relief to creditors who file special requests, most lenders allow the dismissal of a debt-related lawsuit during bankruptcy filings and do not try to circumvent the automatic stay that the courts grant filers.

Those who have been served with paperwork for a creditor lawsuit often worry about the financial implications of a judgment in favor of their creditors. Pursuing a personal bankruptcy filing could help someone halt collection activity that could lead to wage garnishment.