One of the most powerful weapons a creditor has is the civil court system. If you are behind in your repayments, a creditor can issue a suit through a local court – these are state courts and judgements are issued according to state laws. In most states, this process is very creditor friendly. So friendly that if you don’t turn up the creditors claim is accepted and a ‘default judgement’ is made. The term ‘default’ refers to the fact that you have not defended the suit.
A successful suit by a creditor can see your wages garnished, your bank account levied, or your house, car, or valuable assets seized and sold. In some cases, creditors move as quickly as legally possible to enforce the judgements. Filing for bankruptcy will set aside any judgements, however, filing for bankruptcy does take time, leaving a small window that creditors could use to advantage.
Bankruptcy is a Federal Court action and while state laws may be applied, it is still a Federal jurisdiction, and it is generally more debtor friendly than the state civil court system. Filing for bankruptcy creates several situations that favor debtors. First, any pending suits by creditors are stayed and if the debt is eventually discharged, it is withdrawn altogether. Successful suits are also stayed and if the related debt is discharged, the judgement order is reversed.
More importantly, if property or cash has been seized in the period immediately prior to filing for bankruptcy, the trustee appointed to manage the bankruptcy petition normally reclaims them. Once reclaimed, they are placed into the bankruptcy estate and either returned to the debtor or distributed amongst all creditors. If you engage a bankruptcy attorney, they may be able to distribute your exemptions to include those assets.
While you can negate a creditor judgement that has been issued against you, it is often cleaner and easier if you beat those creditors to the punch. If you are in financial difficulties and creditors are threatening a suit, consult an attorney – they may be able to represent your interest during the suit thus preventing a default judgement. They may even be in a position to fight the judgement altogether. If not, they can commence bankruptcy proceedings and thus prevent any further action by your creditors.