Will Bankruptcy Get Rid of Lawsuit Judgments?

If a creditor gets a judgment against you and the debt is dischargeable in a Chapter 7 bankruptcy (not all obligations are), filing for bankruptcy will wipe out a creditor’s ability to collect. Judgments, however, create a lien on your property. And liens don’t go away in bankruptcy automatically.

When a lien attaches to property, such as your house, the creditor will get paid out of the sales proceeds when you sell the home. Fortunately, you can file a motion to avoid the lien in your bankruptcy case, and in many instances, you’ll successfully remove it. But, be aware that you must file the motion—filing a bankruptcy alone will not get rid of it—and it doesn’t work in every situation.

Also, this is a tricky area of bankruptcy law that, in most cases, will require professional help. If you’d like to ensure that you protect valuable property to the best of your ability, it’s prudent to seek the advice of a knowledgeable bankruptcy attorney.

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. Nondischargeable debts include the following:

• student loans (with exceptions)
• child support or spousal support obligations
• debts owed to government entities (fines, taxes, court costs, restitution in criminal cases, etc.), and
• death or injury awards caused by driving while intoxicated.

If the basis of the judgment doesn’t fall into any of these automatically nondischargeable categories, don’t assume that you’re off the hook just yet. Still, other types of debts might be nondischargeable if the creditor files an objection.

The process the creditor must follow to ask the court to find an ordinarily dischargeable debt nondischargeable is to file an adversary proceeding in bankruptcy court. The following types of debts often trigger an adversary proceeding filing:

• 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 doesn’t relate to these categories, and the creditor doesn't object to your discharge, then you can discharge the lawsuit judgment in Chapter 7 bankruptcy (but a lien still might remain—more below).

For more information, read Nondischargeable Debts in Chapter 7 Bankruptcy.

Lien Avoidance

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 might 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 the lien as part of a settlement)
• you have property equity 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 procedures and should act quickly (although most courts will allow you to file a motion to avoid a lien after your bankruptcy case closes). You’ll want to claim that your property is exempt in your bankruptcy paperwork and file a timely motion with the court.

Keep in mind 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. The bankruptcy chapter you file will determine how problematic this issue could be for you.

Complexities exist that are beyond the scope of this article. You should seek legal counsel for an assessment of your particular case. For more information, read Getting Rid of Judgment Liens in Bankruptcy.