What Really Happens When a Debtor Files for Bankruptcy?

If you are involved in a business dispute, a contract claim, or you are owed money by someone who suddenly files for bankruptcy, it can feel like the ground shifts under your feet overnight. Clients often tell us, “Everything was moving forward… then bankruptcy happened, and I have no idea what this means anymore.”

Bankruptcy does not automatically mean everything is lost, but it does change the legal playing field in very real ways. Understanding what happens when a debtor files can help you respond appropriately, protect your rights, and make smart decisions moving forward. At Ayala Law, we handle business litigation and complex disputes every day. Here is what you should know.

What Legally Happens the Moment Someone Files Bankruptcy?

The very moment a bankruptcy case is filed, federal law steps in and creates what is called the automatic stay. Think of it as a powerful pause button.

The automatic stay:

• Stops lawsuits
• Stops collection efforts
• Stops wage garnishment
• Stops foreclosures and repossessions (temporarily)

For creditors and plaintiffs, this means:

• You generally cannot keep pursuing your lawsuit
• You cannot continue efforts to collect
• You must respect the bankruptcy court’s authority

Violating the automatic stay can result in penalties, so it is important to understand it before taking any action.

What Type of Bankruptcy Did They File and Why Does It Matter?

Not all bankruptcy filings are the same. The type of bankruptcy determines what happens next.

Chapter 7 Bankruptcy (Liquidation)

• Used by individuals and some businesses that are shutting down
• A trustee may sell assets to pay creditors
• Many unsecured debts may be discharged

Chapter 11 Bankruptcy (Business Reorganization)

• Common for businesses that intend to continue operating
• Allows restructuring of debts
• Creditors often play a role in the process

Chapter 13 Bankruptcy (Repayment Plan)

• Used mainly by individuals
• Debtor pays through a court-approved plan over 3 to 5 years

Knowing which chapter applies helps you understand whether your claim may eventually be paid, partially paid, or discharged.

Does Bankruptcy Mean the Debt Is Automatically Wiped Out?

Not necessarily. Bankruptcy does not automatically erase every debt.

Debts may fall into several categories:

• Secured debts (backed by collateral, such as property)
• Priority debts (certain taxes, support obligations, etc.)
• Unsecured debts (credit cards, certain contract debts, etc.)

Whether your claim survives, gets paid, or is partially reduced depends on:

• The bankruptcy chapter
• Whether your claim is secured or unsecured
• Whether your claim qualifies as non-dischargeable
• Whether you properly file a Proof of Claim

This is where having knowledgeable legal guidance matters.

What Is a Proof of Claim and Do Creditors Need to File One?

If you are owed money, you may need to file a Proof of Claim in the bankruptcy court. This is the formal way of telling the court:

• Who you are
• What you are owed
• Why you are owed it
• Whether your claim is secured or unsecured

Deadlines matter in bankruptcy. Missing them can mean losing your ability to recover.

Can a Lawsuit Continue After Bankruptcy Is Filed?

In most cases, lawsuits must pause immediately. However:

• Some lawsuits may be allowed to continue with bankruptcy court approval.
• Certain types of claims may still proceed.
• In some cases, claims get resolved in bankruptcy court instead of state court.

Whether your case stops permanently, pauses temporarily, or shifts to a different court depends on the facts.

What Happens to Business Contracts When Bankruptcy Is Filed?

If you are in a contract dispute and the other party files bankruptcy, the contract may:

• Be rejected
• Be assumed and continued
• Be assigned to someone else

This can impact businesses in construction, real estate, service agreements, vendor relationships, leases, and more. Understanding your rights helps protect your position.

How Does Bankruptcy Affect Florida Businesses and Creditors?

Even though bankruptcy is federal law, it often intersects with business litigation, contracts, and real estate disputes in Florida. If you are a business owner, landlord, contractor, or investor dealing with a debtor bankruptcy, you need clarity quickly.

Key Florida considerations may include:

• The impact on pending Florida lawsuits
• Florida judgment enforcement issues
• Real estate and construction disputes affected by bankruptcy
• Business litigation already underway in Florida courts

What Should You Do If Someone Owes You Money and Files Bankruptcy?

Here are practical first steps:

• Do not ignore bankruptcy notices
• Stop collection activity immediately to avoid penalties
• Identify your legal rights and deadlines
• Determine whether you should file a Proof of Claim
• Evaluate whether your claim might be non-dischargeable
• Speak with a lawyer familiar with both bankruptcy and business litigation

The earlier you get advice, the more options you typically have.

Speak with a Law Firm That Handles Complex Business and Financial Disputes

When someone files for bankruptcy, it changes the strategy, but it does not mean you are powerless. At our law firm, we represent Florida businesses, creditors, owners, and professionals who need experienced legal guidance when bankruptcy intersects with ongoing disputes.

If you are facing a bankruptcy complication in a business, contract, construction, or real estate matter, contact one of our experienced attorneys in Miami at 305-570-2208.

You can also contact our team directly at: arianna@ayalalawpa.com 

Schedule a case evaluation online here.

[The opinions in this blog are not intended to be legal advice. You should consult with an attorney about the particulars of your case].