Will Bankruptcy Stop a Judgment? A Comprehensive Guide
What is a Judgment?
A judgment is basically a court order that says you owe money to someone else – usually a creditor or lender. It’s the result of that person/company suing you and winning the case.So if you defaulted on credit card payments or a personal loan, and the bank took you to court over it, the judge could issue a judgment against you for the amount you owe plus interest, fees, etc.Having a judgment on your record is no joke. It can allow the creditor to garnish your wages, put a lien on your property, even take money straight from your bank account in some cases. Yikes!
The Power of Bankruptcy
But here’s the good news – filing for bankruptcy can be a huge help when you’re dealing with a judgment. By starting a bankruptcy case, you immediately get what’s called an “automatic stay.”This is sort of like a force field that stops most creditors in their tracks. They can’t make any more collection attempts, can’t garnish, can’t do anything really until your bankruptcy is resolved.So at the very least, bankruptcy buys you some breathing room from that pesky judgment. But can it make the judgment go away entirely? Let’s dig in…
-Dischargeable vs. Non-Dischargeable Debts
Whether bankruptcy can wipe out a judgment completely depends on the type of debt underlying that judgment. There are two categories:Dischargeable Debts – These are debts that CAN be eliminated through bankruptcy. This includes things like:
- Credit card balances
- Personal loans
- Medical bills
- Utility bills
- Certain types of older tax debts
- Lawsuit judgments for breach of contract, etc.
So if the judgment is based on one of those dischargeable debts, filing bankruptcy is a great option. The judgment should be discharged (eliminated) when your case is finalized.
Non-Dischargeable Debts – On the flip side, there are certain debts that bankruptcy CANNOT get rid of. Common examples:
- Student loans
- Recent tax debts
- Child support/alimony
- Criminal fines or penalties
- Personal injury judgments from drunk driving incidents
If the judgment stems from a non-dischargeable debt like those, then bankruptcy alone likely won’t make it go away. You’ll still be on the hook for paying it off.One important note – even if the debt itself is dischargeable, the creditor may try to argue that the judgment should survive based on “fraud” or other grounds. They would have to file what’s called an adversary proceeding to make this case.But in general, judgments for basic consumer debts like credit cards, personal loans, etc. should be dischargeable through bankruptcy as long as there are no complicating factors.
-The Lien Issue – Securing the Judgment
Here’s where things can get a bit tricky. Even if the underlying debt is discharged, the creditor may have been able to place a lien on your property to secure the judgment before you filed bankruptcy.A lien essentially gives the creditor a legal claim or interest in your home, car, or other assets up to the value of the judgment. So they could potentially force a sale to get their money.The good news is that bankruptcy can help eliminate these judgment liens in some cases. But you have to take specific steps and meet certain criteria, such as:
- The lien is on property you are allowed to exempt (protect) in bankruptcy
- The lien impairs or uses up some of the exemption you’re entitled to
If those conditions are met, you can file a motion asking the bankruptcy court to “avoid” or remove the lien, at least up to the amount of your exemption.For example, let’s say you have a $20,000 judgment lien on your home, and your state allows you to exempt $25,000 in home equity. You could potentially get that $20k lien stripped away since it’s impairing the exemption you’re entitled to.But this is just a simplified example. Lien avoidance can get complicated quickly based on your specific finances, property, state exemption laws, and the type of lien involved. It’s definitely an area where you’ll want to consult an experienced bankruptcy attorney.The key takeaway is that bankruptcy can eliminate judgment liens in the right circumstances, but you can’t just assume it’ll happen automatically. You have to take the proper legal steps.
Timing Your Bankruptcy Filing
One factor that can impact your ability to deal with a judgment in bankruptcy is timing – as in, when you decide to actually file.In an ideal scenario, you’d want to file bankruptcy BEFORE a creditor gets a judgment against you in the first place. This prevents them from getting any lien rights or putting garnishments/levies in place.Once you file, the automatic stay immediately stops the litigation and collections process in its tracks. The creditor is stuck until your bankruptcy is resolved.But of course, that’s not always possible. Sometimes creditors are able to get judgments before you even realize what’s happening and can respond.The good news is that bankruptcy can still help in those situations – it’s just a matter of using the right strategies and procedures to deal with any liens or garnishments that may already exist.For example, you may need to use bankruptcy’s lien avoidance tools we discussed earlier. Or you may need to file a motion asking the court to order the return of any wages or funds that were improperly garnished in the 90 days before your filing.The point is, don’t assume it’s “too late” just because a judgment has already been entered. Bankruptcy gives you a lot of potential tools and remedies – it just may require a bit more legal maneuvering.
H2: Chapter 7 vs. Chapter 13 – Which is Better for Judgments?
There are two main types of consumer bankruptcy – Chapter 7 and Chapter 13. Both can help with judgments, but in slightly different ways:Chapter 7 Bankruptcy
- Allows you to discharge (wipe out) many types of judgments entirely
- Judgment liens may be avoidable in some cases
- The bankruptcy process is relatively quick (3-6 months typically)
- You may have to give up some non-exempt assets
- Income has to be below the state median to qualify
Chapter 13 Bankruptcy
-- Judgments are consolidated into a 3-5 year repayment plan
- You get to keep non-exempt property
- Judgment liens may be avoidable or paid off through the plan
- Available regardless of your income level
- Takes 3-5 years to complete the repayment plan
So in a nutshell, Chapter 7 is a faster way to fully eliminate judgment debts if you qualify based on income. Chapter 13 allows you to reorganize and catch up on judgments over time.Which one is “better” really depends on your specific goals, finances, and whether you have non-exempt assets to protect. An experienced bankruptcy lawyer can review your situation and advise you on the right path.
Potential Downsides to Using Bankruptcy for Judgments
While bankruptcy can provide powerful debt relief from judgments, it’s not a miracle cure. There are a few potential downsides to be aware of:
- Bankruptcy damages your credit score (although judgments do too)
- You may have to give up luxury assets in Chapter 7
- Bankruptcy costs money to file and requires lots of paperwork
- Some types of judgments may not be dischargeable
- You have to take the right legal steps to avoid liens
Bankruptcy is a serious decision with long-term credit implications. It’s not something to rush into without careful consideration and guidance from a professional.That said, for many people struggling with overwhelming judgments, the ability to get a fresh financial start makes bankruptcy well worth it in the long run.
-Getting Professional Bankruptcy Help
As you can see, using bankruptcy to deal with judgments involves a lot of specific legal procedures, requirements, and strategic decisions. It’s not something most people can effectively navigate on their own.That’s why it’s crucial to have an experienced bankruptcy lawyer on your side, like the team at Spodek Law Group. Our attorneys have in-depth knowledge of bankruptcy law and can review your unique situation to determine:
- Whether bankruptcy is the right solution for your judgments
- Which chapter (7 or 13) gives you the best outcome
- How to properly time your bankruptcy filing
- What property you can protect through exemptions
- Whether any judgment liens can be avoided
- How to deal with non-dischargeable judgment debts
- And much more…
We understand that dealing with judgments and debt can be extremely stressful. But you don’t have to face it alone. Our compassionate legal team will walk you through every step, answering your questions and fighting to get you the fresh start you deserve.