If a creditor sues and gets a judgment against you, you can often use bankruptcy to your advantage to discharge (wipe out) the debt and stop many collection actions. However, if the creditor has lien rights against your property, you might—or might not—be able to get rid of the lien in the bankruptcy case. A judgment lien that survives bankruptcy may make it difficult for you to sell or refinance your property later.
Most people end up with a money judgment after a creditor files a lawsuit for an unpaid debt. If you fail to file an answer or you lose the case, the court will enter a judgment for the amount of the debt, plus other amounts, such as the attorneys’ fees and costs for bringing the suit.
Depending on the state laws, a judgment creditor will likely be able to use the judgment to have your wages or bank account garnished (funds are taken without your permission), or even seize and sell your property. When you file for bankruptcy, the automatic stay—an order that the court puts in place—will stop such collection attempts.
After you successfully finish your Chapter 7 bankruptcy or Chapter 13 matter, you’ll likely wipe out the judgment creditor’s right to collect on the debt. (Most but not all such debts get discharged. You’ll find more information below.)
But that doesn’t always mean that you’ll be out of the clear. The money judgment might provide the creditor with a lien that gives the creditor some rights to your property.
The judgment is particularly useful to the creditor because the creditor can use it to create a lien against any property you own. How it works will depend on your state.
For instance, in some states, the judgment automatically creates a lien against your property. However, in many other states, the creditor must record the judgment with the county recorder or the secretary of state to create or “perfect” the lien. If you live in a state that follows the second approach, you might want to hurry and file your bankruptcy before the creditor records the judgment and creates the judgment lien.
Once in place, the lien gives the creditor rights in your property that are similar to those your mortgage or car lender has in the house or car you put up as collateral, but broader. A judgment lien will usually cover all of the property that you own.
Creditors know that a judgment lien is a powerful tool, but you might be able to counter its effects when you file a bankruptcy case as long as you can meet certain conditions:
As discussed above, filing a bankruptcy case discharges your liability if the original debt qualifies for discharge. Bankruptcy law says that all debts are dischargeable unless the code states otherwise. Here are debts that never go away:
Also, a creditor can ask the court to declare additional debts nondischargeable, but only after the creditor files another lawsuit in the bankruptcy court called an adversary proceeding. If the judgment debt fits into one these categories, it will get discharged unless the creditor successfully objects:
(To learn more about whether your obligation will get wiped out in bankruptcy, see The Bankruptcy Discharge.)
Discharging liability on the debt is only half the battle because the bankruptcy filing itself will not discharge a creditor’s lien rights. To eliminate the lien (or a portion of it), you must file a lien avoidance action in the bankruptcy court. To qualify, you must demonstrate that you have the right to exempt (protect) some or all of the equity in the property impaired by the judgment lien. (You’ll be limited to an amount equal to the property exemption.)
If you take no action, the lien will remain attached to your property after the bankruptcy case closes. However, if you fail to file your action before your case is over, most courts let you reopen it to address lien issues.
While it’s possible to handle many simple bankruptcy issues on your own, understanding and handling judgment liens is a complicated matter. A prudent action would be to consult with a knowledgeable bankruptcy lawyer to ensure that you’re taking steps to protect your property.