While many people use settlement loans to avoid filing for bankruptcy while they have a lawsuit pending, sometimes a person may need to file for bankruptcy while he or she has a pending lawsuit. Filing for bankruptcy protection can affect your ability to obtain a lawsuit loan (or pre-settlement funding). This is particularly an issue if you have any unpaid state or federal taxes or existing tax liens, given the priority that unpaid taxes and tax liens receive in bankruptcy over virtually any other type of debt.
However, you can still receive pre-settlement funding for a pending lawsuit from a lender even if you are in the middle of bankruptcy proceedings, depending both on the expected value of your lawsuit as well as the amount of any previous unpaid tax debts you may have that will need to be discharged in bankruptcy.
If your unpaid taxes constitute too high a percentage of the expected amount of your recovery in a lawsuit, then lawsuit loan lenders may not want to take a chance on extending pre-settlement funding to you. On the other hand, if your unpaid taxes or tax liens are not a significant percentage of the money you are looking to borrow, then a lender may choose to extend you a lawsuit loan and may even pay off that tax lien for you so that it does not have to deal with this on the back end when your lawsuit resolves and the lender is paid back.
The Mechanics of Filing for Bankruptcy and What Happens with Your Debts
When you file for bankruptcy, there is an automatic stay put in place on all lawsuits you are a party to, including any lawsuits that have been filed against you by lenders, credit card companies, or any other creditor you may owe money to. The bankruptcy court will divide up your assets to pay off your creditors, and your existing debts are divided into a variety of different categories with different levels of priority assigned to each to each, depending on what types of debts you incurred prior to filing for bankruptcy. Unpaid taxes and tax liens are among the highest priority of debts under the federal bankruptcy code. A certain amount of your assets, as well as certain assets like retirement accounts, are considered exempt or not something that will be available to be divided amongst your creditors to repay the debts you have incurred.
Common Rules of Thumb Lawsuit Loan Companies Use for Borrowers Who Have Filed for Bankruptcy
Settlement advance lenders will not automatically write you off as a potential pre-settlement loan borrower if you have filed for bankruptcy and still owe outstanding tax liens. You may have a very strong lawsuit that a settlement funding provider would be very interested in, regardless of any existing or prior bankruptcies you may have filed. However, a borrower who is going through bankruptcy and does have existing tax liens will receive additional scrutiny as compared with a prospective borrower who may not be going through bankruptcy or may not have such tax liens. This is because those liens will have priority over the repayment of any settlement loan you may obtain when you receive the proceeds from your lawsuit through either a settlement or a jury verdict in your favor.
Many lenders will not provide pre-settlement funding if the amount you owe to the IRS is more than 10% of the amount that you are seeking to borrow, given that the existence of those tax liens may jeopardize the lender’s ability to be repaid for the money it is providing to you.
If you owe less than 10 percent of the money you are looking to get, the loan company may be able to simply repay the tax lien and provide you with the remaining funds from the financing you are applying for.
Apply for a Settlement Loan
At Baker Street Funding, we do offer pre-settlement funding to individuals who may have previously filed for bankruptcy or do so while their lawsuit is pending resolution. We will take a look at both the strength and complexity of your legal case as well as the number of unpaid debts you may have in the form of unpaid taxes or tax liens.
While we typically will not offer settlement loans if you have unpaid tax debts that exceed 10% of the amount of money you are requesting, it is always worth applying because you may find the expected value of your case will dwarf any unpaid taxes or tax liens you may owe.
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