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How a Chapter 7 bankruptcy helps when a creditor sues you

When you fall behind on an account, the creditor or lender will likely start calling you, probably more often than you would like. They may send you strongly-worded letters and advise that they will take legal action.

It’s easy to ignore those letters until a process server shows up at your front door or your place of employment to serve you with legal paperwork. Facing a creditor lawsuit may seem like a nightmare. Often, the courts rule in favor of the lender regardless of your financial hardship. The validity of the debt matters far more than your reason for missing payments in such cases.

You could be subject to a garnishment of your wages or a lien in favor of your lender against your most valuable assets. Rather than going to court to fight the lawsuit, those facing a creditor claim in court may want to file a Chapter 7 bankruptcy.

Bankruptcy can help stop a creditor lawsuit

As soon as you file for personal bankruptcy, you have the protection of an automatic stay. All creditors and lenders must cease collection activity temporarily, including lawsuits and phone calls.

Some of them can file claims with the courts to ask to lift the automatic stay or exclude their debt from the bankruptcy. However, the automatic stay will usually mean that the courts at least temporarily dismiss the lawsuit against you.

If the courts do approve your discharge after you file, you won’t have to worry about collection activity for those same unsecured debts in the future.

Is Chapter 7 bankruptcy right for you?

Those in need of an immediate solution to aggressive collection activity like creditor lawsuits, foreclosure or vehicle repossession may need the help that bankruptcy can offer. Chapter 7 bankruptcy is a particularly effective means of reducing debt quickly.

Although some of your property may be subject to liquidation, you won’t have to worry about repaying those debts. You may have to sell off or refinance some of your property to repay your creditors before a discharge. There are also limitations on your income based on household size and the median state income. Understanding the requirements for and benefits of Chapter 7 bankruptcy can help you put the problems behind you and move on with your life.