If a creditor has a court judgment against you, you can often discharge (wipe out) the debt in bankruptcy. However, it isn't always possible to get rid of a lien in bankruptcy, making it difficult for you to sell or refinance later. Learn about when bankruptcy can do the following:
If you haven't filed yet, take a moment to learn how bankruptcy works and what you should know about bankruptcy. And check out our quick ten-question bankruptcy quiz—it can spot potential bankruptcy issues fast.
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 garnish (take) your wages or bank account 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 finishing your Chapter 7 bankruptcy or Chapter 13 matter, the court will wipe out the judgment creditor's right to collect on the debt if it qualifies for discharge (more below). But you won't be out of the clear if the money judgment provides the creditors with lien rights to your property.
A creditor with a money judgment can use it to create a lien against any property you own, but the specifics will depend on your state. Here are the most common procedures:
If your state follows the second approach, you might want to file your bankruptcy before the creditor records the judgment and creates the judgment lien. Once in place, the lien gives the creditor property rights 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 your property.
Creditors know judgment liens are powerful, but you might be able to counter the effects by filing for bankruptcy and meeting these conditions:
All debts are dischargeable unless the bankruptcy code states otherwise. These debts never go away:
Also, a creditor can ask the court to declare additional debts nondischargeable by filing a lawsuit called an "adversary proceeding." The debt will get discharged unless the creditor can prove:
Discharging the debt is only half the battle because the bankruptcy filing doesn't change a creditor's lien rights. Eliminating all or part of a lien requires filing a lien avoidance action and showing you can exempt (protect) some or all of the equity in the property with the lien on it.
Start by checking the federal and state property exemptions available to you—they tell you the property you can keep in bankruptcy. If successful, you can avoid the lien up to an amount equal to the property exemption.
The lien will remain attached to your property if you do nothing. However, most courts let you reopen a bankruptcy case to address lien issues.
Bankruptcy is an unusual area of law because it's essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because all rules apply in every case, you can't skip a step.
The forms and resources below will help you find more information. Also, you can use this list of Chapter 7 and 13 bankruptcy forms to see where this topic falls. And this handy bankruptcy document checklist will help you gather the things you'll need to complete the petition.
More Bankruptcy Information
You'll find fillable, downloadable forms here:
We want to help you find the answers you need. Go to TheBankruptcySite for more easy-to-understand bankruptcy articles, or consider buying a self-help book like The New Bankruptcy by Attorney Cara O'Neill.
We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by consulting with a local bankruptcy lawyer.