Will Bankruptcy Get Rid of Lawsuit Judgments?
Find out if you can wipe out a lawsuit judgment in bankruptcy and what happens if the creditor has a lien against some of your property.
If you are sued and a creditor gets a judgment against you, you may be able to discharge your personal liability on that judgment in a Chapter 7 bankruptcy. This will depend on whether the underlying debt is dischargeable (meaning you can wipe it out in bankruptcy) or nondischargeable.
Even if you are able to discharge your personal obligation on that debt, the lien may survive the bankruptcy and remain attached to your property, including your house. Under certain circumstances, you may be able to avoid the lien in the bankruptcy, depending on exemptions you have available.
Is the Judgment for a Nondischargeable Debt?
A good starting point in figuring out if you are still liable on the judgment is to ask whether the underlying debt is nondischargeable. Certain debts are usually automatically nondischargeable, including the following:
child support or spousal support obligations
debts owed to government entities (fines, taxes, court costs, restitution in criminal cases, etc.)
post-petition HOA and condo fees, and
death or injury caused by DUI.
If the basis of the judgment does not fall into any of the “automatic nondischargeable” categories listed above, you may not be off the hook just yet. There are still other types of debts that may be excepted from discharge, if the creditor files an objection. The creditor must file an adversary proceeding in bankruptcy court, requesting that the court decide that the particular debt is nondischargeable. If the judgment creditor files an objection to your discharge and proves the underlying debt to be any of the following types, it may not be dischargeable:
injury caused by a willful or malicious act, such as assault
fraud used to obtain money, goods or services, such as lying on a credit application, or
fraud committed while in a position of trust, such as embezzlement while acting as a trustee or guardian.
If the judgment does not relate to these categories, and the creditor doesn't object to discharge, then you can discharge the lawsuit judgment in Chapter 7 bankruptcy.
For more information, read Nondischargeable Debts in Chapter 7 Bankruptcy.
Obtaining a bankruptcy discharge may give you little comfort if the creditor's lien can still attach to your assets, such as your house. There is a way, however, that you can get rid of the judgment lien in your bankruptcy. It is called lien avoidance. Provided that you did not give the creditor a consent judgment, you may be able to remove that lien from your home, car, and any other asset that you could otherwise exempt in your Chapter 7 bankruptcy.
To qualify for lien avoidance, you must prove the following three conditions:
- the lien came from a money judgment issued against you (you did not consent to it as part of a settlement)
- you have equity in property that you can claim an exemption against, and
- the judgment lien eats up some or all of the equity that you could have exempted.
To avoid a lien, you have to follow bankruptcy procedure and act quickly. This includes making a claim that your property is exempt on your Statement of Intention and filing a timely motion with the court.
For more information, read Getting Rid of Judgment Liens in Bankruptcy.