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Los Angeles Bankruptcy Lawyers / Blog / Bankruptcy / The Impact of Bankruptcy on Employment-Related Lawsuits

The Impact of Bankruptcy on Employment-Related Lawsuits


The decision to file for bankruptcy carries wide-ranging implications, extending into various facets of an individual’s life, including their employment. Knowing how bankruptcy affects employment-related lawsuits is important, particularly for those embroiled in them, whether as plaintiffs seeking redress for wrongful termination and discrimination or as defendants navigating claims against them. At Wadhwani & Shanfeld, we understand the complexities surrounding bankruptcy’s impact on employment-related lawsuits, and our Los Angeles bankruptcy attorneys can offer insights into how to deal with these complex legal issues.

Filing for bankruptcy initiates an automatic stay, halting most collection efforts and legal actions against the debtor. However, the automatic stay’s application to employment-related lawsuits is rather complex and significantly influenced by the nature of the claim and the bankruptcy chapter filed.

For Plaintiffs in Employment Lawsuits

For individuals pursuing claims against current or former employers, bankruptcy doesn’t necessarily mean the end of their pursuit of justice. However, it does introduce a layer of complexity to how these claims are handled.

Bankruptcy Estate and Employment Claims

Upon filing for bankruptcy, all of the debtor’s assets, including potential claims or ongoing lawsuits against employers, become part of the bankruptcy estate. This means the bankruptcy trustee assumes control over these claims, deciding whether to pursue or settle the lawsuit on behalf of the estate to benefit creditors. Plaintiffs must disclose any employment-related claims in their bankruptcy filings, failing which can lead to dismissal of their bankruptcy case or other legal repercussions.

Exemptions and Proceeds

Certain exemptions under bankruptcy law may allow plaintiffs to retain some or all of the proceeds from employment-related lawsuits, depending on the nature of the claim and state-specific exemptions. For instance, damages awarded for personal injury, including emotional distress in some employment disputes, may be exempt to a degree.

Navigating Bankruptcy as a Plaintiff

Plaintiffs involved in employment-related lawsuits who are considering bankruptcy should:

  1. Consult with a bankruptcy attorney: Understanding the implications of bankruptcy on your lawsuit is critical. An attorney can advise on the best timing for filing and how to protect any potential lawsuit proceeds.
  2. Disclose all claims: Failing to disclose an employment claim in your bankruptcy filing can have severe consequences. Transparency ensures that your rights are protected.
  3. Understand exemptions: Work with your attorney to identify applicable exemptions that may protect your lawsuit proceeds from being used to pay creditors.

For Defendants in Employment Lawsuits

Defendants facing employment-related claims who file for bankruptcy will find the automatic stay temporarily halts the lawsuit against them. However, this reprieve is often temporary, especially if the claim involves non-dischargeable debts.

Non-Dischargeable Debts in Employment Lawsuits

Debts arising from certain employment actions, particularly those involving willful or malicious harm, may be deemed non-dischargeable in bankruptcy. This means that even after a bankruptcy discharge, the defendant may still be liable for any judgments awarded in the employment lawsuit.

Navigating Bankruptcy as a Defendant

Defendants in employment lawsuits considering bankruptcy should:

  1. Assess the nature of the claim: Determine whether the debts associated with the lawsuit are likely to be dischargeable in bankruptcy. This assessment will influence your bankruptcy strategy.
  2. Consider the timing: Filing for bankruptcy before a judgment is entered in the employment lawsuit may offer broader protections.
  3. Seek legal counsel: An attorney experienced in both bankruptcy and employment law can provide invaluable guidance on managing your defense and bankruptcy filing.

The Intersection of Bankruptcy and Employment Law

The intersection of bankruptcy and employment law is complex, governed by federal statutes, case law, and the specifics of each individual’s circumstances. Whether you’re a plaintiff seeking to protect your right to compensation or a defendant hoping to find relief from financial liabilities, the path forward requires careful navigation and informed decision-making.

Contact Wadhwani & Shanfeld

The decision to file for bankruptcy amidst an employment-related lawsuit is fraught with legal and financial complexities. For plaintiffs, it involves balancing the pursuit of justice with the realities of their financial situation. For defendants, it’s about seeking relief while understanding the limitations of bankruptcy’s protections.

At Wadhwani & Shanfeld, we’re committed to guiding our clients through these challenging intersections, ensuring they’re equipped with the knowledge and support needed to make informed decisions. If you’re facing the dual challenges of bankruptcy and an employment-related lawsuit, we’re here to help you navigate the path to financial recovery and legal resolution.



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