Will Bankruptcy Get Rid of Lawsuit Judgments?

As you make your way through life learning to juggle many balls at once – family, work, play, money – sometimes you drop a ball. And when that ball is your financial health, if you are like most people, you will start looking for solutions as soon as you hear the thud. Solutions can come in a variety of forms, and one such solution that you may be considering is bankruptcy.

However, once you start to consider bankruptcy as an option, you will likely have many questions such as:

  • What type of bankruptcy is right for me?
  • How will bankruptcy affect my future?
  • How much of my debt will be discharged?
  • And many others . . .

And if you currently have a judgment from a lawsuit against you or any liens on your property that resulted from judgment, you will likely wonder how bankruptcy will affect those liens. Will they be discharged along with all of your other debt? Or will the court refuse to discharge them?

The Difference between a Judgement and a Lien

Well, first things first. Let’s clarify the difference between a judgment and lien.

If someone has sued you and won, then it is likely that the court entered a money judgment against you. For instance, if you owe Credit Card Company “A” the amount of $5,000 and have stopped paying your bill, then the credit company can file a suit against you. After filing suit, they will have to present evidence to the court to prove that you owe the money; and, after making such a showing, it is likely that the judge will enter a judgment against you in the amount that they see fit – likely for at least the $5,000 in question.

However, the mere presence of a judgment against you will not typically be the end of the matter. Credit Card Company “A” knows that you likely have little money available to pay that judgment, or you would have simply paid your bill and no suit would have been necessary. So how do they plan to get blood from a stone? By filing a lien on any property that you own.

For instance, if you own your home and it is worth $200,000, then Credit Card Company “A” may take their judgment and file a lien on your house in the amount of the judgment. In our fictitious scenario, this would be a lien in the amount of $5,000. This means that, if and when you sell your home, Credit Card Company “A” would be entitled to $5,000 of the proceeds. This is referred to as “perfecting the judgment.” Note that it does not happen automatically. If a company or entity wants the judgment perfected, they must proactively file the lien.

There are many types of liens:

  • Bank liens
  • Mechanic’s liens
  • Real estate liens
  • Tax liens
  • And more

Does Bankruptcy Remove a Judgement?

When you file for bankruptcy, it is critical that you list all debts that are to be included in that bankruptcy. A financially-based judgment is essentially a debt and must be listed.  Therefore, if your bankruptcy is granted, it will get rid of (or discharge) your judgment along with the rest of your debt. This is the case even where a lawsuit has been filed against you, but a judgment has not yet been issued. That’s good news.

Here’s the bad news. Just as every type of debt is not dischargeable through bankruptcy, neither is every type of judgment. In other words, if the judgment against you was based on an underlying debt that is not dischargeable in bankruptcy to start with, then you may be out of luck. So what types of debts are not dischargeable through bankruptcy?

  • Personal injury or wrongful death awards to a victim caused by the debtor’s drunk driving;
  • Certain taxes;
  • Criminal penalties, restitution, or fines;
  • Student loans;
  • Malicious or willful injury caused by the debtor;
  • Domestic support obligations like alimony or child support; and
  • Fraudulent debts.

If the judgment against you is based on any of the above reasons, it will not be discharged in bankruptcy.

Bankruptcy Removing a Lien

So let’s take it one step further. If a judgment against you has resulted in a lien, then subsequently filing for bankruptcy does not automatically remove that lien. The only way to remove that lien is to file a motion with the court, asking to have that lien removed. Here’s where it gets complicated.

The rules of whether a lien can be removed are complex and take some calculating. According to 11 U.S.C 522(f), a lien can be removed “to the extent that it impairs an exemption to which the debtor would have been entitled in the absence of the lien.”

So basically, this rule takes into consideration the value of the asset, any other liens that are held against the asset, any available exemptions, and when the lien was attached to the asset.

 

Posted in