Can I File for Bankruptcy If I Have a Judgment Against Me?

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:

• stop creditor collection actions
• erase judgment debt, and
• eliminate liens.

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.

How Bankruptcy Stops Creditor Collection Actions

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.

How Money Judgments and Property Liens Work

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:

• the judgment will automatically create a lien against your property, or
• the creditor must record the judgment with the county recorder or secretary of state to create or "perfect" the lien.

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.

Lien Avoidance in a Bankruptcy Case

Creditors know judgment liens are powerful, but you might be able to counter the effects by filing for bankruptcy and meeting these conditions:

• the underlying debt is dischargeable, and
• the lien prevents you from using an exemption to protect the property in bankruptcy.

Which Debts Are Dischargeable?

All debts are dischargeable unless the bankruptcy code states otherwise. These debts never go away:

• child support and alimony
• recent income taxes
• fines and restitution
• homeowner's association and condo fees that accrue after a bankruptcy filing
• obligations that arise due to death or injury caused by intoxicated driving, and
• student loans (unless you prove undue hardship in a separate action).

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:

• willful or malicious injury
• money, goods, or services obtained by fraud (like debts incurred on the eve of bankruptcy), and
• embezzlement or fraud committed while in a position of trust.

Avoiding a Judgment Lien Impairing an Exemption

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.

Navigating Your Bankruptcy Case

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.

Need More Info?

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.