I am a bankruptcy attorney and I would be happy to assist you. A company can file bankruptcy and discharge debts relating to contracts or lawsuits, as long as there is no allegation of fraud in the matter. The court will not discharge judgments based on fraud. If the company files bankruptcy right now, it will actually stop the law suit due to the automatic stay and it will discharge any debt the company owes to the Plaintiff before any default judgment occurs. Of course a Chapter 7
liquidation of the debt will also mean that the company would be liquidated along with any of its assets to repay the company's creditors. The worse case scenario in bankruptcy would be that the Plaintiff will file an adversary proceeding against the company in the bankruptcy court
. The benefit would be that the trustee
would be involved, as well. An adversary proceeding is similar to a mini-trial before the bankruptcy judge assigned to your case. The Plaintiff would have to argue why his debt should not be discharged in the case. It is common, but rarely does the judge find reasoning without evidence of fraud to not discharge a litigation/contract debt. So the company will have the advantage in bankruptcy court, versus state court.
Your attorney mentioned a scenario as well that can occur. It is called "piercing the corporate veil." If the company filed bankruptcy, the Plaintiff could sue you personally, claiming that you somehow mismanaged the company and filed bankruptcy on behalf of the company in order to avoid paying the Plaintiff's debt. In which case you would need to defend yourself personally, and potentially might want to file personal bankruptcy
, as well. I am not saying he would win, but he has the right to try. It sounds like your attorney was just trying to warn you of worst case scenarios. I would recommend that you meet with a bankruptcy attorney as soon as possible in your area. A great place to start is by contacting your local state bar lawyer referral service where they can provide you with the name and number of a pre-approved bankruptcy attorney who typically provides discounted consultations.
I hope my answer has assisted you and that you will leave me a positive rating. Please feel free to ask for my directly by name if you have any follow-up questions.