By Jon G. Brooks | Published: March 4, 2012
As with so many other questions pertaining to bankruptcy law, the best answer to the question of whether a person intending to file bankruptcy must file an Answer to a new civil suit is: “it depends.” I am often asked by the prospective client considering filing personal bankruptcy whether he should first go ahead and file an Answer to a civil lawsuit. Most often this person has recently been served with a summons and complaint filed in Santa Clara County Superior Court or another Bay Area superior court. Assuming that the individual has been properly served, a defendant in a California civil suit must file a formal Answer in the court where the complaint was filed within 30 calendar days of being served. If a defendant fails to file an Answer within this 30-day period, the plaintiff may first enter the defendant’s default, and subsequently obtain a default judgment against the defendant. The problem arises where the person is unable to file bankruptcy within this short timeframe because, for example, there has been a preferential payment to an insider. or a fraudulent transfer. and the debtor needs to allow more time to pass before filing bankruptcy.
Assuming the client is ultimately eligible for bankruptcy relief, most civil judgments in California can be discharged in bankruptcy. If that debt would otherwise be dischargeable, the mere fact that the plaintiff obtained a court judgment against the debtor does not change the dischargeability of the debt. However, it is always important to remember that bankruptcy only discharges personal liability—a bankruptcy discharge by itself does not remove liens from property. If, for example, a debtor allows a judgment creditor to obtain a judgment and then record a judicial lien against the debtor’s home, then it may or may not be possible to remove that judgment lien in the debtor’s California bankruptcy. A judgment lien can be avoided by the debtor in Chapter 7 bankruptcy only to the extent that lien “impairs” the debtor’s homestead exemption.
As Bay Area homes have declined in value, we have represented fewer and fewer Chapter 7 clients who actually have any equity in a homestead to protect. Hence, if the Chapter 7 bankruptcy client owns a home against which a judicial lien has been recorded prior to filing bankruptcy, but that home is underwater with no equity, then we cannot remove the lien in
the Chapter 7 case. Upon receiving his discharge, the Chapter 7 client will be relieved of personal liability for the debt, but the judicial lien will remain as an encumbrance on his home. In other words, he will never be able to sell or otherwise transfer the property without satisfying the lien. In such a case, if the debtor were unable to file bankruptcy before the creditor obtained a judgment in the underlying civil lawsuit, it would have been preferable had this person at least filed an Answer in California superior court to delay as long as possible the entry of default in that case until whatever conditions that had prevented filing his bankruptcy petition were no longer present.
In advising a client whether or not to file an Answer to a new lawsuit in civil court before filing bankruptcy, we must determine the identity of all parties being sued. If the debtor is being sued individually, together with this California corporation or LLC, for example, a personal Chapter 7 bankruptcy filing will offer the individual the immediate protection of the Automatic Stay. stopping the lawsuit in its tracks as to that individual. But the co-defendant corporation or LLC will not receive any protection at all unless it files its own bankruptcy petition. If it is not in a position to do so immediately, then it should file an Answer in the civil suit.
Finally, it is always crucial to remember that not all debts may be discharged in bankruptcy. If a complaint states causes of action for one or more types of actual or constructive fraud, misrepresentation, and similar torts, and if the plaintiff obtains a judgment on those causes of action, such a judgment may render the debt forever non-dischargeable under one of the exceptions to discharge found in Section 523 of the Bankruptcy Code in any subsequent bankruptcy. A debtor should never allow a plaintiff to obtain by default a judgment including civil causes of action for fraud. Instead, unless she can file bankruptcy before the plaintiff can obtain a default judgment, she should always file an Answer and make the plaintiff prove his case.
Timing a bankruptcy filing, particularly when there is a recent civil suit pending against the debtor, requires consideration of many factors relating to bankruptcy and California law. Always consult an experienced California bankruptcy attorney as early as possible if you’re served with a summons and complaint.