Being Sued or Threatened Over A Debt? Should You Consider Bankruptcy?

Category: Personal Bankruptcy (14) comments

Suing you is the final “threat” that a collection company makes when they are trying to pressure someone to make payments towards an overdue debt.  In reality, very few people are ever sued, but the threat certainly gets your attention.

Before discussing how filing for bankruptcy or a consumer proposal can help you stop a lawsuit, perhaps a brief description of how a lawsuit works might be helpful. We will use Ontario as the example, but the principals are the same across all provinces.

There are two types of Court that may be used to sue someone. In Ontario for example, if the total debt is under $25,000 a claim may be filed in Small Claims Court.  Debts over $25,000 must be pursued in the Superior Court of Ontario.  Small Claims Court is designed to be less expensive and more efficient and it is more likely to be used by collection agencies.

being sued and bankruptcy

Bankruptcy is a Stay of Proceedings

When you file personal bankruptcy, a consumer proposal, or a Division I proposal (a more complicated type of proposal for people with debts over $250,000 excluding their mortgage) an automatic Stay of Proceedings is created.  A Stay of Proceedings is a legal term that means legal actions against you are stopped.  It doesn’t matter what stage of the process the lawsuit is at – issued a Statement of Claim, obtained a Default Judgment, obtained a Writ of Execution, even started garnisheeing your pay.  Whatever stage the lawsuit is at, the Stay of Proceeds stops it.

If a creditor wants to proceed with the lawsuit they have to bring a motion before the Bankruptcy Court and ask permission to carry-on.  Permission will be granted if the debt is of a type that may survive bankruptcy.  This includes Family Court matters, as well as lawsuits that are based on allegations of fraud or misrepresentation.  Lawsuits for unpaid credit card bills, or outstanding loans don’t qualify.

Should You File Bankruptcy?

The next question that needs to be answered is “does it make sense to file bankruptcy or a consumer proposal in order to stop the lawsuit?”  This may be much more complicated.

If you are like most people that are sued for an unpaid bill, you probably have more than just this one bill that you have fallen behind on.  Depending on the total amount that you owe and your personal situation filing for bankruptcy may make sense. Alternatively, a consumer proposal offers the same protection as bankruptcy with additional benefits  – they are certainly worth consideration.

If the debt you are being sued for is your only debt then the decision to file bankruptcy may be more difficult.  It is possible for a creditor to make your bankruptcy much more complicated, lengthy and therefore expensive.  When there is only one creditor involved this is much more likely.

If you are being threatened with a lawsuit for an unpaid debt then it makes sense for you to contact a bankruptcy trustee to review your situation and options.  A trustee is not a lawyer so they can’t assist you with the lawsuit, but they can explain the process in greater detail and help you understand how bankruptcy might help you deal with the problem.

Leave A Comment

  1. Richard G.

    Dear Mr Michalos,

    I won a default judgement against an indivudual who then went bankrupt. My lawyer shouod have included fraud in the suit, since his company and personal finances were misrepresented. Yiu mentioned bankruotcy court to a judgement alive, is there anything I can do through this method.


    1. Ted Michalos Post author

      You have the right to bring a motion before the Bankruptcy Court to have your debt excluded from the bankruptcy. In order to do so you will have to prove fraud or misrepresentation. I am not a lawyer, but I suspect you will be told the matter requires a trial and if you can prove your case your debt will survive the bankruptcy. An alternative approach might be for you to oppose the bankrupt’s discharge – you could then ask the Court to require the bankrupt to make additional payments into the bankruptcy. You won’t get to keep all of this money, but it will increase the total amount of money in the bankruptcy being divided up amongst the creditors (including you).
      My best advice – speak to a lawyer experienced in insolvency law and ask them to assess your chances.

  2. Anonymous

    I am at fault in an accident and am uninsured. I will have to pay out for costs and damages. If I am either paying the insurance company for costs, or am getting sued by them, would bankruptcy be a viable option?

  3. helena

    I am being sued for credit card debt that was about 5k but with interest is about 10k now. I had paid 2 of the 3k they had wanted me to but then ran out of money. They have said they want to file against me. I don’t know what to do because I don’t have the ability to pay as I am in and out of the hospital. Should I try and get a lawyer?

  4. Nataly Carranza

    I was called by a collection agency that if I don’t agree to pay an old debt, wells fargo will sue me, I was so scared that I agree to pay a settlement but I have not signed a document that they sent me. I had giving them my debit card info the account went delinquent 10 years ago

    1. Ted Michalos Post author

      I am sorry Nataly, but what’s your question? If you are having second thoughts about paying the old debt then don’t pay it. Depending on where you live, the debt is likely no longer collectible and if they sue you have a defence in Court based on the age of the debt. In Ontario it is called the Limitations Act – a creditor has 2 years to commence legal action or you have a defence in Court to say “it has been more than 2 years, I no longer felt I owed the debt”.

  5. Rosy

    Hi, Am i able to sue my ex for a credit card that i had to pay for him after we were divorced as the card was joint? I am being held responsible for the debt.
    He refused to help pay.
    He just filed consumer proposal
    Can I sue him for non payment of debt?

    1. Ted Michalos Post author

      If you have some sort of agreement that indicates it was his debt exclusively then you might be able to take some form of action in Family Court. If you sued him in Civil Court it would be a detb provable/included in his proposal (assuming you paid off the debt in full). Sorry.

  6. Fred

    I just recieved a letter that a former coworker is suing me for deformation of character for $150,000.
    Would it make sense to file for bankruptcy?

    1. Ted Michalos Post author

      Sorry, but there is no way for me to know. Bankruptcy may be an option, but you should contact a trustee in your area to discuss it in detail. Something to consider is that you cannot pick and choose when you file bankruptcy – it deals with all of your unsecured debts. Whether or not it makes sense for you to file bankruptcy will depend on your overall financial situation.

    1. Ted Michalos Post author

      Probably, but you can’t just file bankruptcy for the car loan. You have to include all of your unpaid debts (overdraft, credit cards, income taxes to name a few). Certainly worth looking into as a possible solution to your problem.


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