Chapter 7 bankruptcy can eliminate many unsecured debts. Some unsecured debt can even be discharged in a Chapter 13 bankruptcy case. But, what happens if credit card debt, medical bills, personal loans, or other unsecured debt is reduced to judgment?
When a creditor or debt buyer files a lawsuit and gets a judgment against you, that generally doesn’t change whether the debt is dischargeable. That means some judgment debts are dischargeable and some are nondischargeable. The question becomes a bit more complicated if the creditor gets a judgment lien on your property. But, you may be able to avoid judgment liens in bankruptcy, keep your property, and discharge the debt.
Here’s how it works.
What is a Judgment?
A judgment is a court order that says you are legally responsible for paying the plaintiff, the company or person that sued you. Money judgments are entered in a wide variety of types of cases. Some examples include personal injury, medical malpractice, and breach of contract claims. Debt collection lawsuits are a type of breach of contract suit. The creditor goes to court claiming that you agreed to make payment in exchange for a service or a loan or goods you received, and you failed to do so.
Judgments in debt collection cases are entered in a few different ways. Some judgments are entered by consent, meaning that the debtor and creditor came to some sort of agreement. Usually, this involves the creditor reducing the balance due or agreeing to smaller payments over time. In other words, the creditor usually offers something that benefits the debtor. Other judgments are entered by the court after a hearing or trial. Still others are entered by default.
A default judgment is entered when the person being sued fails to file a response, or to appear in court. The exact process required to avoid a default judgment is a matter of state law. Surprisingly, most judgments in debt collection cases are default judgments. In other words, the judgment is entered because the person being sued didn’t try to defend themselves. A judgment appears in the public records section of our credit report.
In the bankruptcy court, it won’t matter how the judgment was entered, unless the debtor is claiming that the judgment is not valid.
What Types of Judgment Debt are Dischargeable?
Dischargeable Judgment Debt
If the underlying debt is dischargeable in bankruptcy and there is no judgment lien, then the judgment doesn’t change the status of a debt. A claim based on an outstanding medical bill is treated the same as a claim based on a judgment for an unpaid medical bill. Medical bills are typically unsecured and may be discharged. So, a judgment for delinquent medical debt can typically be discharged, too.
If there’s no judgment lien, it’s usually that simple. Dischargeable debt is dischargeable debt, even if the creditor has a judgment against you.
Nondischargeable Debt and Judgments
The general rule for nondischargeable debts is the flipside of what’s described above. Dischargeable debt stays dischargeable when reduced to judgment. Nondischargeable debt remains nondischargeable.
For example, a judgment for unpaid child support, alimony, or student loan debt generally won’t be cleared in Chapter 7 bankruptcy. That’s because most student loans and domestic support obligations are nondischargeable under the U.S. Bankruptcy Code. Certain other types of debts are also nondischargeable, including some tax debt, debt resulting from embezzlement and certain other financial crimes, and debt relating to injuries caused while operating a vehicle under the influence.
What if a Judgment Hasn’t Been Entered Yet?
For some people, being sued triggers a bankruptcy filing, or speeds up a plan to file bankruptcy. Often, that means the bankruptcy case is filed while a lawsuit is in progress, but no judgment has been entered.
In most cases, an automatic stay is triggered as soon as the bankruptcy petition is filed. The automatic stay is an order from the bankruptcy court telling creditors and debt collectors to stop trying to collect. That includes all types of collection activity, from sending threatening letters and calling you to wage garnishment, repossession, and filing lawsuits.
The order is temporary, but generally remains in effect until the bankruptcy discharge has been entered. In some cases, a creditor can ask the court to lift the stay. When a creditor does file a successful motion for relief from the automatic stay, the stay is lifted only as to that creditor. And, it’s usually only for a specific purpose.
The automatic stay interrupts collection effort even if a lawsuit has already been filed. So, if a debt collection suit is in progress when the automatic stay is entered, the case cannot move forward. If a judgment hasn’t been entered, the court can’t legally move forward unless the stay is lifted.
Judgment Liens v. Other Secured Debt
A judgment lien is treated differently than some other types of secured debt in bankruptcy. That’s because bankruptcy exemptions protect certain property from creditors--even a judgment creditor.
To illustrate, let’s look at two different scenarios involving a lien on a motor vehicle. If you have an outstanding balance on your car loan and the automobile was pledged as security when you purchased the car, bankruptcy doesn’t undo that pledge. Bankruptcy may relieve you of personal responsibility for the debt, but the security interest remains. The secured creditor--the lender who provided the purchase money for your car--has a contractual right to take back the car if you don’t pay. Under some circumstances, the bankruptcy court may be able to reduce the amount due. But, you can’t simply keep the car and discharge the debt.
A judgment lien is different because there was no security contract - you didn’t voluntarily grant the creditor a lien. Instead, this type of lien is entered in an attempt to collect a debt. That means exemptions apply, and you may be able to avoid the lien. Imagine that you’ve filed using federal exemptions, and that your car is worth $3,000. Your credit card company has a $5,000 judgment against you, and has placed a lien on your car.
The federal exemption protects up to $4,000 in value in a motor vehicle. That means the full value of your car is exempt and the judgment lien can typically be avoided.
The same distinction applies to other types of exempt property, including real estate. You generally can’t avoid your mortgage in bankruptcy, but lien avoidance may be an option if a creditor has placed a judgment lien on your house. Depending on the exemptions in your state, even your bank account may be protected.
The Bottom Line on Judgments in Bankruptcy
In most cases, the bankruptcy court will treat a debt that has been reduced to judgment the same way it would have treated that debt before you were sued. Most unsecured, nonpriority debt will be included in the bankruptcy discharge, even if the creditor has a judgment against you.
Upsolve Helps People Get Relief without a Bankruptcy Attorney
Upsolve is a nonprofit organization dedicated to helping people get the debt relief they need. We’ve helped many people file Chapter 7 bankruptcy on their own. But, we know that isn’t the answer for everyone. We also provide information about many other debt resolution options. And, if you don’t qualify for our services or just prefer to have representation, we can help you find a local bankruptcy lawyer.