Can You File Bankruptcy on a Judgment?

Yes, bankruptcy can erase the debt behind a money judgment and stop most collection actions right away. But a judgment lien stays on your property unless you ask the court to remove it, and it can make it difficult to sell or refinance later. You can get rid of a lien in bankruptcy to the extent it impairs an exemption, which protects some or all of your property's value. Below, you'll learn how discharge, the automatic stay, and lien avoidance work, and which judgment debts survive. (11 U.S.C. § 522(f).)

Does Bankruptcy Erase a Judgment and Its Lien?

Bankruptcy erases your personal liability for a judgment debt that qualifies for discharge, but it doesn't automatically erase the lien. After you finish your Chapter 7 bankruptcy or Chapter 13 matter, the court wipes out the creditor's right to collect the debt from you. But you won't be out of the clear if the money judgment gave the creditor lien rights to your property. (11 U.S.C. § 524(a).)

Debts That Survive Bankruptcy

Most judgment debts are dischargeable, but the bankruptcy code makes a few types survive. (11 U.S.C. § 523(a).)

These debts generally survive bankruptcy:

• 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).

Debts a Creditor Can Challenge

A creditor can ask the court to declare a debt 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.

The creditor must file the lawsuit within 60 days after the first date set for the meeting of creditors, or the debt gets discharged. (Fed. R. Bankr. P. 4007(c).)

How to Remove a Judgment Lien in Bankruptcy

You remove a judgment lien by filing a motion asking the bankruptcy court to “avoid” (eliminate) it, and the court will grant it to the extent the lien impairs an exemption. Discharging the debt is only half the battle, because the bankruptcy filing doesn't change a creditor's lien rights. (Fed. R. Bankr. P. 4003(d).)

When You Can Avoid a Judgment Lien

You can avoid a judgment lien when it attaches to your property and keeps you from using an exemption to protect that property. You must meet both conditions:

• the lien is a judgment lien on your property, and
• the lien impairs an exemption you could otherwise claim.

Start by checking the federal and state property exemptions available to you. They tell you the property you can keep in bankruptcy. To measure impairment, add the judgment lien, all other liens on the property, and the exemption you could claim if there were no liens. If that total exceeds the property's value without liens, the lien impairs your exemption by the difference, and you can avoid the lien up to that amount. You can't avoid a lien that secures child support or alimony. (11 U.S.C. § 522(f).)

Example of Full Lien Avoidance

Molly can avoid her entire $12,000 lien. She filed for Chapter 7 bankruptcy to discharge her debts, including a $12,000 judgment she owed on a credit card. Molly's house is worth $120,000. Her mortgage balance is $90,000. Her state allows a $40,000 exemption on her residence, so her $30,000 equity is fully covered.

The $12,000 impairs her exemption because, with the judgment, her equity is reduced to $18,000; without the judgment, she can exempt the full $30,000 equity. The numbers confirm it: $12,000 + $90,000 + $40,000 is $142,000, which exceeds the home's value by $22,000. Because that's more than the lien, Molly can avoid the whole judgment lien by filing a motion in the bankruptcy court.

Example of Partial Lien Avoidance

Reggie can avoid only $7,000 of his $12,000 lien. He also has a $12,000 judgment. His home is also worth $120,000, and his mortgage balance is $90,000, leaving $30,000 in equity. Reggie's state has a $25,000 homestead exemption. But his equity is $30,000. That means his exemption will not cover $5,000 of his equity.

The $12,000 judgment impairs only $7,000 of Reggie's exemption, because $12,000 + $90,000 + $25,000 is $127,000, which exceeds the home's value by $7,000. It doesn't impair the other $5,000 because that amount is not exempt. If Reggie files a motion to avoid the lien, the bankruptcy court will erase only $7,000 of the lien. Therefore, the lien will only be worth $5,000.

Even though Reggie can't eliminate the entire lien, he will likely see benefits that make his action worthwhile. Reducing the amount can reduce the creditor's incentive to foreclose to collect the debt. Later, when Reggie puts the property on the market, he'll only have to pay off $5,000 (plus accrued interest) instead of the original $12,000.

What If You Don't Avoid the Lien?

The lien will remain attached to your property if you do nothing, but most courts let you reopen the case later to file the motion. You might owe a reopening fee. (11 U.S.C. § 350(b).)

How Bankruptcy Stops Creditor Collection Actions

The automatic stay, an order that takes effect when you file your case, stops most collection attempts right away. It doesn't remove a lien, but it blocks the creditor from acting on it while your case is open. (11 U.S.C. § 362.)

Depending on the laws of your state, a creditor with a judgment against you might be able to

• garnish your wages without your permission
• garnish your bank account without your permission
• seize and sell your personal property, and
• place a lien against, seize, and sell your real property

How Creditors Get a Judgment Lien

A creditor with a money judgment can use it to create a lien against certain property you own, but the specific procedure and the property it covers depend on your state. In most states, a judgment lien attaches to real estate, and some states also allow liens on certain personal property. 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. A judgment lien attaches to real estate you own in the county where it's recorded. A lien the creditor records within 90 days before you file can also be a “preference” the bankruptcy trustee can undo. (11 U.S.C. § 547.)

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.

Next Steps for Judgment Liens in Bankruptcy

Start by listing every judgment against you and the property each one might attach to, then ask a local bankruptcy lawyer whether you can avoid the liens. Online articles can't address all bankruptcy issues or the facts of your case, and a lawyer is the best way to protect your assets. In the meantime, here are additional articles you might enjoy:

• Dealing With a Deficiency Judgment After a Car Repossession
• When a Creditor Gets a Lien Against Your Property
• How Much Debt Do I Need to File for Bankruptcy?
• Will I Lose All My Property If I File for Bankruptcy?