Will Bankruptcy Get Rid of Lawsuit Judgments?

If a creditor obtains a judgment against you for a dischargeable debt in Chapter 7 bankruptcy, filing for bankruptcy will eliminate the creditor's ability to collect. However, a creditor with a judgment can place a lien on your property, which can be problematic.

Since liens don't disappear in bankruptcy automatically, it is possible to eliminate a lawsuit judgment while still being burdened by the lien after the case. Learn why one of the simplest ways to avoid this issue is by filing for bankruptcy before a lawsuit judgment is issued against you.

Lawsuit Judgments and Bankruptcy: The Basics

A lawsuit judgment enhances a creditor's ability to collect a debt, and you can't always eliminate that power in bankruptcy. While bankruptcy can often erase your responsibility to pay a lawsuit judgment, if the creditor used the judgment to place a lien on your property, in many instances, you'll remain at risk of losing the property if you don't pay.

This article takes you through this challenging area, covering key issues you'll need to understand, including the differences between judgments and judgment liens, debts you can erase or "discharge" in bankruptcy, property exemption rights and liens, and lien avoidance in Chapter 7 and Chapter 13.

What Rights Does a Creditor Have Without a Money Judgment or Lien?

Not many. Most bills, such as credit card balances, medical bills, rental agreements, and personal loans, aren't "secured" by collateral like a home or vehicle that the creditor can seize if you fail to pay. Additionally, the law generally prohibits most unsecured creditors from placing a lien on your property if you don't pay what you owe (although some, such as the IRS, have this right).

Without a money judgment, collateral, or a lien on your property, your credit card company, the local gym owner, or other unsecured creditor can request payment, but that's about it. An unsecured creditor has limited options if you stop paying your debt.

Can Creditors Get Money Judgments and Liens?

Yes. An unsecured creditor who wishes to employ more aggressive methods to compel you to pay can obtain the right to seize your property without your consent. However, these creditors must first sue you in court.

In court, the creditor must demonstrate the balance owed to the court's satisfaction. If successful, the court will grant the creditor a money judgment. This money judgment predominantly protects the creditor's right to collect, but it also protects you by ensuring that the creditor utilizes the tactics outlined in the next section to collect what is owed, not more.

What Rights Do Money Judgments and Liens Give Creditors?

Once the creditor has a money judgment, the power shifts. The money judgment gives the creditor tools that can strip you of assets. Specifically, a creditor with a money judgment in hand can do the following:

• "garnish" your wages or deduct funds from your paycheck
• "levy" your bank account and force your bank to turn over funds, and
• "seize" or take property, such as a house or car, for sale at an auction.

A money judgment also lets the creditor attach a lien to your property. A lien gives a creditor an ownership interest in the property until you pay the debt (more below).

In some states, a judgment automatically gives a creditor a lien right against some or all of your property. Other states require the creditor to file the money judgment with the recorder's office, state secretary, or a similar office first.

How Can a Judgment Creditor Use a Lien to Collect?

With the lien in place, the creditor can force a sale of the property and use the proceeds to pay toward the balance owed, or wait until you sell the asset and get paid out of the profits. Creditors usually place a lien on a home or other real property because it's often the person's most valuable asset.

However, forcing a sale of real estate can be expensive and complicated, so many creditors wait for the debtor to sell it. The debtor must pay off the lien before transferring the title to the new buyer. If you'd like more details, read How Creditors Enforce Judgments.

What Happens to Judgments and Liens in Bankruptcy?

Assume the trial has concluded, the creditor prevailed, and the judge awarded the creditor a monetary judgment. If the judgment is for a debt you can discharge, such as a credit card balance, and didn't involve fraud, and the judgment creditor hasn't placed a lien on your property, Chapter 7 bankruptcy will provide a quick and easy solution. You'll likely walk away from the entire matter without paying anything.

You might benefit from bankruptcy if the judgment creditor has already placed a lien on your property, but you'll face additional work. If the judgment involves fraud, bankruptcy might help if luck is on your side, but only if the creditor fails to take necessary steps. If the judgment concerns a nondischargeable debt, there's likely no reason to file unless you would gain by eliminating other debts or repaying the judgment over time through Chapter 13 bankruptcy.

Is the Judgment for a Nondischargeable Debt?

The simplest way to start your analysis is by determining whether bankruptcy will wipe out the debt. If the underlying debt is nondischargeable, like those below, you won't be able to erase it in bankruptcy:

• student loans unless you file and win a bankruptcy lawsuit
• child support or spousal support obligations
• debts owed to government entities, such as fines, taxes, and criminal restitution
• debts for certain types of loans owed to pension, profit sharing, stock bonus, or retirement plans
• some unlisted debts, and
• death or injury awards caused by driving while intoxicated.

If you have one of these debts and need time to repay it, consider filing for Chapter 13. You can force the creditor into a five-year repayment plan while simultaneously handling other financial issues. Another benefit? The creditor won't be able to garnish your wages, levy your bank account, or seize property while you pay into your Chapter 13 plan.

Learn more about debts a bankruptcy discharge won't eliminate.

Is the Judgment Based on Assault or Fraud?

Don't assume you're off the hook if the judgment doesn't fall into a nondischargeable category. Other debts can also be declared nondischargeable by a bankruptcy judge if a creditor asks. The most common debts that can be made nondischargeable include the following:

• an 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
• deception committed while in a position of trust, such as embezzlement while acting as a trustee or guardian.

Are you confused about why these debts differ from the debts discussed above? If so, you're not alone. Here's the critical difference.

If the debt falls under one of these categories and the creditor doesn't object, you can discharge the lawsuit judgment. Therefore, if the judgment creditor does nothing, your responsibility to pay will be erased with other qualifying debts.

However, if the creditor objects by asking the bankruptcy court to declare the money judgment debt nondischargeable, the bankruptcy court will likely rely on the underlying judgment and declare the debt nondischargeable.

Tip. Consider filing for bankruptcy soon after being served with a lawsuit containing fraud allegations. You could come out ahead. If your quick action deprives the creditor of a money judgment, the creditor will be forced to prove the fraud allegations at a bankruptcy trial rather than simply asking the bankruptcy judge to declare the debt nondischargeable based on the fraud judgment from the previous court. This is where luck enters the picture. Sometimes, creditors assume the matter will be erased in bankruptcy and do nothing, or don't think they'll be able to collect if you're bankrupt and don't want to exert the time and money necessary to pursue a lawsuit.

Did the Judgment Creditor Already File a Lien Against Your Property?

Liens can be problematic because, in many cases, they survive bankruptcy. Obtaining a bankruptcy discharge won't matter much if the creditor's lien is still attached to your assets, such as your house.

Here's the typical scenario.

You allowed a credit card lawsuit to go to judgment without appearing in court because you didn't have a viable defense. The court issued a money judgment against you for a dischargeable credit card debt, and you filed for bankruptcy soon after. However, the creditor used the money judgment to file a lien against your house before you could file for bankruptcy.

You knew that your bankruptcy filing wiped out the money judgment and eliminated the creditor's ability to garnish your wages or take money from your bank account. However, you didn't realize the bankruptcy did not affect the lien until years later when you sold the house. You had to pay the lien in full before transferring ownership to the new buyer.

As the example demonstrates, if the lien remains, the creditor retains the right to sell the property after the bankruptcy case's conclusion or wait until you sell it to take its share, even if you wiped out the money judgment in bankruptcy. If you don't understand this, many years later, you could discover you still owe a creditor for a debt you thought was erased in bankruptcy.

What Can Be Done With a Property Lien in Bankruptcy?

The good news is that you might be able to eliminate a judgment lien in bankruptcy. The bad news is that even if you can remove the lien, it will only be to the extent that you could have "exempted" or protected the property during bankruptcy.

When You Can Avoid the Judgment Lien in Bankruptcy

You can eliminate some or all of a judgment lien in bankruptcy through "lien avoidance." Here's what you'll need to prove:

• the lien came from a money judgment issued against you (you didn't consent to the lien as part of a settlement or voluntarily agree to the lien as part of a sale, and it's not a statutory lien, such as a property tax, child support, or mechanic's lien)
• you have property equity that you can claim an exemption against, and
• the judgment lien eats up some or all of the equity you could have exempted.

To avoid a judgment lien, you must follow bankruptcy procedures, and it's best to act quickly. However, if you forget to handle the lien, most courts will allow you to file a motion to avoid a lien after your bankruptcy case closes.

Can You Exempt the Property in Bankruptcy?

You must have the right to keep or exempt the property in bankruptcy. 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. However, in his state, 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 entirely 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. An exemption doesn't cover Tiffany's cabin. Even though she can wipe out the credit card debt in a Chapter 7 bankruptcy because the property is nonexempt (and located in the county), the court won't remove the lien. After the bankruptcy, the credit card company can 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?

Filing a Lien Avoidance Motion in Bankruptcy

You'll want to claim your property's exempt status in your bankruptcy paperwork and file a timely motion with the court. Remember that if you have more equity than what you can exempt, your creditor will likely argue that the lien is valid only up to the exemption amount. Whether you file for Chapter 7 or Chapter 13 will determine how problematic this issue could be for you.

For instance, the trustee might still sell the property in Chapter 7 bankruptcy and return the exempt portion to you. In Chapter 13, you'd likely be better off. You could keep the property by paying an amount equal to the nonexempt part through the Chapter 13 repayment plan.

Lien removal is a tricky area of bankruptcy law, and complexities exist beyond this article's scope. To protect valuable property to the best of your ability, you should meet with a bankruptcy lawyer for a thorough case assessment. For more information, read Getting Rid of Judgment Liens in Bankruptcy.

Need More Bankruptcy Help?

Did you know Nolo has made the law accessible for over fifty years? It's true, and we wholeheartedly encourage research and learning. You can find many more helpful bankruptcy articles on Nolo's bankruptcy homepage. For instance, Nolo articles will explain what bankruptcy can do, what you'll want to avoid before filing for bankruptcy, and more. Information needed to complete the official downloadable bankruptcy forms is on the Department of Justice U.S. Trustee Program website.

However, online articles and resources can't address all bankruptcy issues and aren't written with the facts of your particular case in mind. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.