Legal Definitions - suggestion of bankruptcy

A suggestion of bankruptcy is a formal legal document filed with a court to inform it that one of the parties involved in an ongoing lawsuit has filed for bankruptcy. This notification is critical because, once a bankruptcy petition is filed, an "automatic stay" immediately goes into effect under bankruptcy law.

The automatic stay is a powerful legal injunction that temporarily stops most collection activities, lawsuits, and foreclosures against the person or entity that has filed for bankruptcy. By filing a suggestion of bankruptcy, the party alerts the court that it must pause any ongoing proceedings related to the bankrupt individual or entity, as the automatic stay legally prevents further action in that case without permission from the bankruptcy court.

• Example 1: Debt Collection Lawsuit

  Imagine Sarah is being sued by a credit card company for an unpaid balance. Before the trial date, Sarah files for Chapter 7 bankruptcy. Her bankruptcy attorney then files a suggestion of bankruptcy in the credit card lawsuit. This document informs the court handling the credit card case that Sarah has entered bankruptcy. Due to the automatic stay, the court must immediately halt all proceedings in the credit card lawsuit, preventing the credit card company from continuing its efforts to collect the debt through that court action.

• Example 2: Foreclosure Proceeding

  A bank has initiated a foreclosure lawsuit against John's home because he fell behind on mortgage payments. Just days before the scheduled foreclosure sale, John files for Chapter 13 bankruptcy. John's attorney files a suggestion of bankruptcy with the court overseeing the foreclosure. By filing this document, the court is notified of John's bankruptcy. The automatic stay immediately takes effect, legally requiring the court to stop the foreclosure proceedings and cancel the upcoming sale. The bank cannot proceed with the foreclosure without first obtaining permission from the bankruptcy court.

• Example 3: Business Litigation

  Tech Innovations Inc. is being sued by a competitor for patent infringement. During the discovery phase of the lawsuit, Tech Innovations Inc. experiences severe financial difficulties and files for Chapter 11 bankruptcy. Tech Innovations Inc.'s legal counsel files a suggestion of bankruptcy in the patent infringement case. This filing informs the court presiding over the patent dispute that Tech Innovations Inc. has filed for bankruptcy. The automatic stay then pauses the patent infringement lawsuit, preventing the competitor from continuing to pursue its claims against Tech Innovations Inc. in that court while the bankruptcy proceedings are underway.