Bankruptcy Stay

“I have an existing case which seems to be taking forever to settle. I was told there is a stay or hold on the case because one of the defendants is in bankruptcy. How long can a case be stayed?”

When we initially consult with clients, we try to give clients a range of how long their case might be around until it is resolved. This is far from an exact science, but based upon the case type, likely venue, and decades of experience, we are able to give people a good faith range. However, when one of the defendants files for bankruptcy protection, this puts a hold on the case until the bankruptcy case is resolved in some fashion.

A bankruptcy is settled when the creditors agrees to a plan to pay off debts, or the debtor files for liquidation to get rid of their debt. Either of these options take years, and all the while, the personal injury case sits idle. We normally advise our clients to go to the bankruptcy court and petition to lift the stay to the extent of available insurance. This limits the personal injury recovery to the extent of insurance (whether it is $1 million or $25,000), but it moves the personal injury case toward settlement. This is normally in the injured party’s interest because if the defendant is already bankrupt, the odds of collecting a judgment against such a defendant are minimal.

Bankrupt defendants must be handled quickly and professionally. The attorney must file a ‘proof of claim’ with the bankruptcy court when she or he learns of the bankruptcy. The attorney will also have to file a stipulation or possibly a motion in bankruptcy court to lift the stay.

I will share one story of a prior case with our office of one of the longest running cases we had. In this particular case, after some initial discovery, one of the defendants filed for a bankruptcy stay putting the case on hold. The defendant was a business entity and it took some time to lift the stay in bankruptcy court.  Unfortunately, when the stay was lifted on the defendant, the defendant’s insurer went bankrupt. There was another stay until the New York Liquidation Bureau took over the case from the bankrupt insurer and eventually the client received a settlement. But this case was an extreme outlier.