Ask a Lawyer: Can Bankruptcy Clear Lawsuit Judgments?

Many types of debt can be discharged or reorganized through Chapter 7 or Chapter 13 bankruptcy, including most lawsuit judgments. However, whether a lawsuit judgment will be discharged in bankruptcy depends on the type of judgment it is. Another important factor is whether the creditor who won the judgment has a lien on property you own.

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 credit card debt, personal loans, and medical bills.

If you don't respond to the creditor's lawsuit and a default judgment is entered against you, or you do respond to the lawsuit and you 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

Right after you file your bankruptcy petition, the bankruptcy court will enter an automatic stay that will require most creditors to stop all collection efforts. This means they can't contact you about repayment, 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 kind of dischargeable debt — such as credit card debt, overdue utility bills, medical bills, or personal debts to family, friends, or others — can generally be discharged. Bankruptcy, however, will not get rid of 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:

  1. Child support or alimony
  2. Student loans (unless undue hardship is proven)
  3. Some kinds of taxes
  4. Criminal fines or restitution
  5. Drunk driving-related debt

There are two additional types of debt that are considered dischargeable unless the creditor objects and the court approves. 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, be sure to keep reading because you will have to take additional steps to clear it.

If Your Property Has a Lien Against It

One thing you need to know is 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 in the case of a mortgage or car loan where the house or car is used as collateral. It gives your creditor rights to your property, and it 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 (see list of non-dischargeable debts above). Creditors do have the opportunity to 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. Getting the lien removed requires a separate step of filing a lien avoidance action with the bankruptcy court.

In order for the lien to be partially or wholly removed, you have to be able to show the court there is equity in the property affected by the judgment lien that you have a right to exempt 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

As you can see, bankruptcy can get very complicated, especially when issues like property liens are involved. That's why it's best to speak with a local bankruptcy attorney about your options and the steps you should take to best protect your property.

Bankruptcy is not the only debt relief option available to you. The attorney you meet with can explain other courses of action as well.