Filing for bankruptcy is an effective way to wipe out an obligation to pay a credit card debt. But it isn’t as simple when you have a judgment against you. If, as a result of the judgment, the creditor has obtained a lien (ownership interest) against your property, you’ll have to file (and win) a motion asking the bankruptcy court to avoid the lien. Otherwise, the creditor will retain a right to sell the property after the conclusion of the bankruptcy case (or wait until you sell it to take its share).
When you fall behind on your credit card payment, you can expect the phone to start ringing. Eventually, collection letters will follow. But, because most credit card debts are unsecured—the creditor can’t take back the property you bought because you didn’t agree to guarantee the debt with collateral—there isn’t much more a creditor can do other than repetitively contact you.
If you filed for bankruptcy at this point, the credit card debt would be dischargeable in bankruptcy, and the creditor wouldn’t have a lien against your property.
(Learn more by reading What to Expect When Your Debt Goes to Collection.)
If the creditor wants to take more aggressive means to collect the judgment, it must sue you in court for a money judgment in the amount you owe.
A money judgment gives a creditor additional tools it can use to collect, such as the following:
In some states, a judgment automatically gives a creditor a “lien” right to all of your property. Other states require the creditor to file the money judgment with the recorder’s office, the secretary of state, or a similar office, first.
A lien gives the creditor an interest in your property. The creditor with a lien can sell the property and use the proceeds to pay toward the judgment balance or wait until you sell the asset and get paid out of the proceeds.
(If you’d like more details, read How Creditors Enforce Judgments.)
When you file a Chapter 7 bankruptcy, you’re allowed to keep or “exempt” a certain amount of property. If the judgment lien gets in the way of this right, the court will likely agree to avoid it so that you maintain clear property ownership. If you aren’t entitled to exempt the asset, or if the lien is another type—such as a voluntary lien given when purchasing a house or car—the lien will remain in place.
Example 1. Henry can exempt $5,000 in equity in a car. His vehicle is worth $4,000, allowing him to protect it in a Chapter 7 bankruptcy. In his state, however, a creditor with a judgment automatically gets a lien against all of the debtor’s personal property, including a car (and Henry has a money judgment against him). His attorney files a motion asking the court to avoid the lien. Because Henry can fully exempt the vehicle, the court agrees.
Example 2. Tiffany’s credit card company obtained a judgment for $25,000 and filed it with the Stoney County recorder’s office, giving the credit card company a lien on all of Tiffany’s real estate in the county. Tiffany’s cabin isn’t covered by an exemption so even though she will be able to wipe out the credit card debt in a Chapter 7 bankruptcy, because the property is nonexempt (and located in the county), she won’t be able to remove the lien. After the bankruptcy, the credit card company will be able to sell the cabin (or wait for Tiffany to do so) and recover the lien amount.
(For more details, see What Happens to Liens in Chapter 7 Bankruptcy?)
Sometimes a lien motion doesn’t get filed during a bankruptcy. If you (or your attorney) failed to do so, don’t panic. Most courts will allow you to handle the issue after the closure of the case.
(To learn about the lien avoidance procedure, read Getting Rid of Judgment Liens in Bankruptcy.)