Can Bankruptcy Clear Lawsuit Judgments?

Whether a specific judgment can be cleared depends on the type of debt. Most judgments from credit cards, medical bills, and personal loans are dischargeable, but judgments for child support, student loans, and fraud-related debts are not.

Chapter 7 bankruptcy or Chapter 13 bankruptcy can discharge or reorganize many types of debts, including most lawsuit judgments. Whether a judgment will be discharged in bankruptcy depends on its type. Another critical factor is whether the creditor who won the judgment has a lien on your property.

Bankruptcy Can Discharge Money Judgments

If you’re in over your head with debt, you may already have lawsuit judgments against you. Creditors commonly file breach-of-contract claims against debtors for 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, the court can enter an order against you for the debt you owe and other costs, including attorney and filing fees. The same can occur if you do respond, but lose.

The money judgment may allow your creditor to garnish your wages, your bank account, or take your assets in order to collect on the outstanding debt. Filing for bankruptcy can eliminate judgments and stop wage garnishment, but it depends on the type of original debt.

Filing vs. Discharge

When you file bankruptcy, there is an automatic stay on all types of collection actions. During the bankruptcy process, creditors cannot call you, evictions cannot go forward, and some wage garnishments are suspended. After bankruptcy, any debts not discharged must be repaid, and garnishments may continue.

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 call your phone number about a repayment plan. 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 arising from dischargeable debts, such as credit card debt, overdue utility bills, medical bills, or personal debts to family, friends, or others, can generally be discharged. Bankruptcy will not eliminate judgments stemming from non-dischargeable debt.

What’s a non-dischargeable debt? It’s types of money owed that bankruptcy discharge can’t clear. These include:

• Child support or alimony/spousal support
• Student loans (unless there is undue hardship)
• Some types of taxes
• Criminal fines or restitution
• Drunk driving-related debt
• Debts related to willful or malicious injury
• Money, goods, or services obtained by fraud

Bankruptcy doesn’t automatically clear judgment liens, even if they originated from dischargeable debts. If your property has a lien against it, you’ll need to follow the additional steps listed below to clear it.

Should I File Bankruptcy Before or After a Judgment?

Creditors often threaten legal action to pressure debtors to pay up. They seldom follow through unless a debtor owes a great deal of money, as litigation is costly and the outcome is not always favorable. If you believe court action is inevitable, or if you’ve had a judgment issued and you can’t meet the terms, you may need to consider bankruptcy as a final option.

Whether you should file before or after a judgment or litigation is a legal question that requires an attorney’s answer. Unless you’re well-versed in bankruptcy law, it’s a good idea to speak with a bankruptcy attorney before making any moves.

With that in mind, here are a few things to be aware of:

• If you file before the lawsuit is filed, the suit cannot continue. The automatic stay prevents any further action from continuing until after the bankruptcy is discharged or dismissed.
• If you file during the lawsuit, the process is suspended until after the bankruptcy case. Any lawsuits you have against others, such as personal injury cases, become part of the bankruptcy estate. The bankruptcy trustee can decide whether to continue the case. If judgment in a case has not been issued, you may be able to settle the debt within the bankruptcy process.
• If you file after the judgment, you may need to remove any liens placed on the property. This could mean surrendering some or all of any settlement to satisfy your creditors.

Some judgments and lawsuits, such as criminal cases, tax fraud, and domestic support obligations, are not affected by the automatic stay.

Judgment Liens

A judgment lien gives the creditor a claim against your property, similar to a mortgage. Even if bankruptcy discharges the judgment debt (meaning you no longer owe the money personally), the lien can remain attached to your property unless you take an additional legal step called “lien avoidance.”

To remove a judgment lien in bankruptcy, you must file a separate motion with the bankruptcy court. This is only possible if the following three conditions are met:

• The underlying debt is dischargeable (like credit card or medical debt)
• You have an exemption that would protect the property
• The lien ‘impairs’ (interferes with) your exemption

For example, let’s say you own a home worth $200,000 with a $150,000 mortgage, giving you $50,000 in equity. Your state allows a $50,000 homestead exemption. A creditor puts a $10,000 judgment lien on your home, but it ‘impairs’ your exemption because it prevents you from fully using your $50,000 protection. You can file a lien avoidance motion to remove it.

If you don’t remove the judgment lien, the creditor can potentially force the sale of your property after bankruptcy to collect their money. While bankruptcies are handled in federal court, some states offer additional protections. A bankruptcy attorney will be well-versed in any state aids.

What Is an Automatic Stay?

If you file bankruptcy and already have a judgment (or judgments) against you, it triggers an automatic stay. As the name implies, an automatic stay takes effect immediately, without any action on your part. It halts all collection efforts, including phone calls, letters, and emails.

A stay suspends all existing lawsuits and halts any wage garnishments, often starting with your next paycheck. If legal action has been threatened but not yet started, the stay will prevent them from filing. A creditor can ask the court to lift a stay through something called a Motion for Relief from the Automatic Stay. They must show that their property interest is not adequately protected by the stay.

If your wages are garnished due to a credit card judgment and child support order when you file for bankruptcy, the stay causes the wage garnishment for the credit card debt to cease and not begin again until your bankruptcy is decided. Child support payments aren’t affected by the stay, so you’ll still be required to make those payments.

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 a good idea to speak with a local bankruptcy attorney who knows the Bankruptcy Code for legal advice about protecting your personal property.

A skilled attorney can examine your situation and help you figure out your next move. Bankruptcy is not the only debt relief option available, and your attorney can explain other courses of legal action.