Can Bankruptcy Clear Lawsuit Judgments?
You may be wondering if bankruptcy stops lawsuit judgments, or court orders stating that you owe a balance to your lenders/creditors.
Chapter 7 bankruptcy or Chapter 13 bankruptcy can discharge or reorganize many types of debts, including most lawsuit judgments. However, whether a lawsuit judgment will be discharged in bankruptcy depends on the type of judgment it is. Another critical factor is whether the creditor who won the judgment has a lien on your property.
Bankruptcy Can Discharge Money Judgments
If you have found yourself in over your head with debt, you might already have lawsuit judgments against you. Creditors commonly file breach of contract claims against debtors over unpaid debts such as credit card debt, personal loans, and medical bills.
If you don't respond to the judgment creditor's lawsuit and there is a default judgment against you, or you do respond to the lawsuit and lose, the court can enter an order against you for the debt you owe and other costs, including attorney and filing fees.
The money judgment may allow your creditor to garnish your wages or bank account, or take your assets in order to collect on the outstanding debt. Many people wonder if filing bankruptcy can get rid of the judgments and stop wage garnishment. Oftentimes, it can, depending on the type of original debt.
Dischargeable vs. Non-Dischargeable Debt
After you file your bankruptcy petition, the bankruptcy court will enter an automatic stay, requiring most creditors to stop all collection efforts. This means they can't contact your phone number about a repayment plan. And, any collection lawsuit, eviction, foreclosure, repossession, or wage garnishment is paused while you work through your bankruptcy case.
At the end of the bankruptcy process, court judgments stemming from any dischargeable debt such as credit card debt, overdue utility bills, medical bills, or personal debts to family, friends, or others, can generally be discharged. However, bankruptcy will not eliminate judgments stemming from non-dischargeable debt.
That means a bankruptcy discharge can't clear judgments stemming from one of the following types of non-dischargeable debt:
- Child support or alimony/spousal support
- Student loans, unless there is undue hardship
- Some kinds of taxes
- Criminal fines or restitution
- Drunk driving-related debt
Two additional types of debt are generally considered non-dischargeable and not removed by bankruptcy. These two kinds of debts are those relating to:
- Willful or malicious injury
- Money, goods, or services obtained by fraud
Additionally, bankruptcy does not automatically clear judgment liens, even if they originated from dischargeable debts. If your property has a lien against it, keep reading because you will have to take additional steps to clear it.
If Your Property Has a Lien Against It
You need to know whether the creditor has a lien against your property. Depending on your state's laws, the creditor may have been able to use the judgment to get a lien against your property, and in some states, the judgment creates a lien automatically.
A judgment lien works a lot like a mortgage or car loan, where the house or car is used as collateral. It gives your creditor rights to your property and usually includes all of the property you own. A judgment lien is a powerful tool for creditors, but bankruptcy can sometimes counteract it.
In order to stop a judgment lien through bankruptcy, the original debt has to be dischargeable. Creditors can ask the court to make other debts non-dischargeable, but this requires them to file adversary proceedings in bankruptcy court.
Even if the debt is dischargeable, the bankruptcy alone won't discharge the creditor's lien against your property. Removing the lien requires a separate step of filing a lien avoidance action with the bankruptcy court.
For the lien to be partially or wholly removed, you have to show the court there is equity in the property affected by the judgment lien and that you have a right to an exemption in the bankruptcy. Then, only the property amount equal to what can be exempt is removed from the creditor's judgment lien.
If you don't take this extra step to file a lien avoidance action, the creditor's lien will remain in place and you could still lose your property.
Talk to a Bankruptcy Lawyer About the Best Option
Bankruptcy filings and bankruptcy law can become complicated, especially when issues like property liens are involved. Self-help is an option, but it's best to speak with a local bankruptcy attorney who knows the Bankruptcy Code for legal advice about protecting your personal property.
Bankruptcy is not the only debt relief option available to you. The attorney you meet with can also explain other courses of legal action.