When a borrower files for bankruptcy, it instantly alters the legal playing field—not just in bankruptcy court but in state courts as well. Creditors with active or pending litigation in state courts often face significant uncertainty about what happens next. Do their lawsuits pause? Can they still collect judgments? Are their claims at risk of being discharged or de-prioritized?
The intersection of state court litigation and federal bankruptcy proceedings is complex, and understanding how to navigate both forums is critical for creditors seeking to protect their rights and maximize recoveries.
In this blog, we’ll explore key issues surrounding jurisdictional conflicts, the impact of the automatic stay, and practical strategies for preserving and asserting creditor claims in both venues.
Federal vs. State Jurisdiction in Bankruptcy Context
Federal bankruptcy courts are courts of limited jurisdiction. Their power to hear and decide matters arises from Title 11 of the U.S. Code (the Bankruptcy Code) and is confined to bankruptcy-related matters. On the other hand, state courts operate under general jurisdiction, hearing a broader range of civil and criminal matters, including debt collection, contract disputes, and foreclosures.
When a debtor files for bankruptcy, the federal court doesn’t necessarily assume control over every pending legal action. The determining factor is whether the matter is “core” or “non-core” to the bankruptcy proceeding.
Core Proceedings: These are matters that arise directly from the bankruptcy case or that can only be decided in bankruptcy court. Examples include the confirmation of a plan, dischargeability of debts, and the automatic stay.
Non-Core Proceedings: These are related to the bankruptcy case but could be adjudicated in state court. For example, a breach of contract claim may continue in state court if it doesn’t interfere with bankruptcy administration.
While bankruptcy courts have jurisdiction over all matters related to the debtor’s estate, state courts may retain concurrent jurisdiction over certain claims, especially those based on state law or involving third-party defendants not in bankruptcy.
Understanding this division is essential. Creditors must evaluate where their claim stands and which forum is most appropriate for pursuing relief—while staying in compliance with federal bankruptcy rules.
The Automatic Stay: Halting State Court Actions
Perhaps the most significant and immediate impact of a bankruptcy filing on state court litigation is the imposition of the automatic stay under 11 U.S.C. § 362. The stay is a legal injunction that stops all collection efforts, lawsuits, foreclosures, and other actions against the debtor or their estate the moment a bankruptcy petition is filed.
The purpose of the stay is to give the debtor breathing room and to prevent a race to the courthouse by creditors. However, for creditors actively involved in state litigation, this can be frustrating and disruptive.
What the Stay Covers:
- Continuation of any judicial or administrative proceeding against the debtor
- Enforcement of a judgment obtained before the bankruptcy
- Acts to obtain possession of property belonging to the bankruptcy estate
- Setoff of debts without court permission
What the Stay Does Not Cover:
- Criminal proceedings
- Certain domestic support obligations
- Actions against non-debtor third parties (in most cases)
Violating the automatic stay can result in significant penalties, including sanctions and punitive damages. For this reason, creditors must immediately halt any state court proceedings upon notice of a bankruptcy filing and assess their options.
Seeking Relief from the Automatic Stay
In some cases, creditors may determine that state court litigation should proceed despite the bankruptcy filing. The proper legal mechanism in such scenarios is to file a motion for relief from the automatic stay with the bankruptcy court.
This motion must demonstrate that allowing the state court case to move forward will not:
- Adversely affect the bankruptcy estate,
- Violate the debtor’s protections, or
- Impede the orderly administration of the bankruptcy case.
Common reasons courts grant stay relief include:
- Foreclosures on property where the debtor has no equity and the property is not essential to reorganization
- State court litigation that is near completion and does not interfere with the bankruptcy process
- Cases involving co-defendants not subject to the stay
Obtaining stay relief allows creditors to continue pursuing remedies in state court, though any recovery may still need to be funneled through the bankruptcy process depending on the outcome.
Discharge Injunctions and State Court Judgments
Even after a debtor receives a discharge in bankruptcy, creditors must understand that not all debts are discharged—and certain judgments may remain enforceable depending on the circumstances.
For example:
- Debts obtained by fraud may be nondischargeable under § 523(a)(2)
- Judgments for willful and malicious injury are also excluded under § 523(a)(6)
- Student loans and domestic support obligations are rarely dischargeable
Creditors with state court judgments prior to the bankruptcy must analyze whether the underlying claim falls into a nondischargeable category. If so, they may need to file an adversary proceeding in bankruptcy court to have the judgment declared nondischargeable.
Importantly, creditors cannot continue collection activity on a judgment after discharge unless the debt has been explicitly excepted from discharge by the bankruptcy court. Doing so could violate the discharge injunction under § 524(a) and lead to further sanctions.
Strategic Use of Adversary Proceedings
Adversary proceedings are formal lawsuits within a bankruptcy case. For creditors seeking to:
- Challenge the discharge of a specific debt,
- Object to the debtor’s overall discharge,
- Assert fraudulent transfer or preference claims, or
- Determine lien validity or priority,
…filing an adversary proceeding is often the most effective option.
These proceedings resemble federal civil litigation, with discovery, motion practice, and trial, but are handled within the bankruptcy court system. Creditors who are proactive in this process can often preserve the enforceability of prior state court judgments or avoid losing leverage due to bankruptcy protections.
Preserving Claims Across Forums
For creditors litigating in state court when a debtor files for bankruptcy, preserving legal rights in both forums requires swift, strategic action. Here are key steps to take:
- File a Proof of Claim
Even if you had a lawsuit or judgment pending in state court, you must file a proof of claim in the bankruptcy case to be recognized as a creditor. This is especially critical in Chapter 13 and Chapter 11 cases where distributions are made to creditors. - Monitor Deadlines
Bankruptcy court has its own strict deadlines for filing claims, objecting to plans, or initiating adversary proceedings. Missing these dates can result in loss of rights—even if you had an active state court claim. - Evaluate Whether to Remove or Remand
In some cases, state court litigation may be removed to federal bankruptcy court if it’s closely tied to the case. However, creditors can seek to remand the case back to state court if it’s more appropriate to resolve the matter there. - Assess Forum for Best Outcome
Depending on the type of claim, creditors may fare better in one forum than the other. Bankruptcy court can be efficient and centralized but may limit remedies. State court may allow broader damages or more favorable precedent for breach or tort claims. - Don’t Assume the Judgment is Safe
A state court judgment doesn’t automatically survive bankruptcy. Creditors need to evaluate the nature of the underlying claim and whether it qualifies as nondischargeable—and then take action in bankruptcy court to protect it.
Common Jurisdictional Conflicts
Even experienced creditors’ counsel can run into jurisdictional confusion when dealing with parallel proceedings. Common conflict scenarios include:
- Post-petition enforcement of pre-petition state court judgments
- Bankruptcy trustee asserting removal of state court claims
- Conflicting rulings between bankruptcy and state courts
- Disputes over asset ownership in concurrent probate and bankruptcy matters
These situations require a nuanced understanding of both state and federal court procedures. Creditors should work with counsel experienced in both venues to avoid waiving rights or pursuing claims in the wrong forum.
Best Practices for Creditors Dealing with Bankruptcy Filings Mid-Litigation
When you’re a creditor in the middle of a state court lawsuit and the defendant files bankruptcy, use the following checklist:
- Immediately stop all collection activity
- Review the bankruptcy petition to understand chapter and asset/liability structure
- Determine if your claim is secured, priority, or general unsecured
- File a timely proof of claim
- Analyze whether your claim is potentially nondischargeable
- Consider filing a motion for relief from stay
- Consult bankruptcy counsel to evaluate whether to file an adversary proceeding
- Track key case deadlines for plan confirmation, objections, and dischargeability
Being proactive and well-informed allows creditors to minimize losses and preserve legal rights—despite the debtor’s bankruptcy.
Final Thoughts: Coordinated Strategy Is Key
At Tatman Legal, we understand how frustrating it can be for creditors when a bankruptcy filing halts your state court litigation and puts your judgment at risk. But you don’t have to sit back and accept a loss. With the right legal strategy, creditors can assert their rights in both forums, preserve claims, and—when possible—continue collection efforts through permitted legal channels.
Whether you’re already in litigation, received a discharge notice, or need help filing an adversary proceeding, Tatman Legal is here to help you navigate the intersection of state court and federal bankruptcy proceedings.
Contact us today to protect your interests and ensure your claims are enforced to the fullest extent of the law.