Can I File Small Claims in Bankruptcy?

Collecting on all of your outstanding debts is a good business practice, but certain legal issues can make the matter more complex. When a debtor files for bankruptcy, a creditor must stop pursuing a lawsuit in small claims and file that debt with the bankruptcy court handling the case. If a creditor attempts to collect the debt in other ways, he may be subject to penalties or even a lawsuit.

Automatic Stay

Automatic stays are one of the protections that bankruptcy proceedings afford a debtor who has filed for bankruptcy. Once an automatic stay is awarded to a debtor, all creditors attempting to collect on a debt must stop all collection activities, including wage garnishment, repossessions or small claims lawsuits. This allows the bankruptcy court to take the time to collect all debt information, including small claims lawsuits. While the automatic stay is in effect, only the court can order the debtor in bankruptcy to settle a debt dispute with his available cash or assets.

Violations and Penalties

All collection practices attempted for small claims debts on the part of the creditor can be voided by the bankruptcy court. If a creditor is found to be in violation of the automatic stay, the debtor in bankruptcy can file a lawsuit for damages, including emotional distress, actual damages, punitive damages and attorney's fees. The only legal way to recoup a small claims debt while the debtor is in bankruptcy is by filing the claim with the federal bankruptcy court processing the case.

Collecting a Debt

If a small claims debt has yet to be collected by the time the debtor enters bankruptcy, the creditor must petition the bankruptcy court to be recognized as a legal creditor. Contact the small claims court clerk or bankruptcy court clerk to find the case number for the bankruptcy proceedings. Most of the debtor's obligations to creditors, including small claims, are discharged during bankruptcy proceedings, but filing a debt claim with the bankruptcy court establishes a creditor's right to at least some of a debtor's property or assets.

Considerations

If a debtor has not entered bankruptcy, pursuing debt collection aggressively might not be the best option. A creditor may recoup the entire claim through bankruptcy, but if a debtor doesn't have the assets to cover all outstanding debts, some debts will have to be satisfied at less than the actual amount owed. Many small claims debts are less than $7,500 and can be paid off over a few years if a repayment schedule can be worked out. Creditors attempting to collect a debt in bankruptcy should seek legal help through an attorney familiar with rights and remedies during bankruptcy.