The goal of filing bankruptcy is to eliminate your debts, and most debts are discharged in bankruptcy. The most well-known debts that are NOT discharged are debts related to divorce, most student loans, and some tax debts. But an ordinary debt based on a credit card or other loan, even if a creditor has gone to court and gotten a judgment, should be discharged in bankruptcy. However, if you have a judgment against you, there may be one additional step necessary to clear up the judgment.
Most people are familiar with the things that creditors can do to enforce a judgment against you. They can file a wage deduction against your income, they can freeze and garnishee your bank account, and they can bring you into court for an examination of your finances known as a citation. But they can also file a lien against your home; and, unlike the other collection actions, you won’t get a notice that they have done so.
Fortunately, there are a couple of things you can do in a bankruptcy to get rid of a judgment lien. In a Chapter 7 bankruptcy, your lawyer can file a motion to “avoid” or remove the lien, if certain facts are true. State law give you a $15,000 “exemption” to protect the first $15,000 in equity in your home ($30,000 for a married couple who jointly own the home). If the equity in your home, after deducting the mortgage balance(s) from the value, is less than the $15,000 (or $30,000) exemption, you can remove the judgment lien entirely. Even if there is some equity after the mortgage and exemption, you may be able to reduce the amount of the judgment lien.
In a Chapter 13 repayment plan, your lawyer can move to avoid the lien, just as in a Chapter 7, and there is another weapon available. If the judgment lien was filed against your home in the 90 days before you file bankruptcy, your lawyer can file a complaint to avoid the lien as a “preference.” The idea of a preference is that creditors should start at the same starting line when you file bankruptcy. If any creditor gets a head start by collecting money, or getting a lien on your home, the creditor can be made to give up its advantage. This can work even if there is lots of equity in your home; but remember that it only works if the lien was recorded within 90 days before your Chapter 13 is filed. So if you have been sued by a creditor, it is best not to wait to consult with a bankruptcy attorney.
This is as complicated as it sounds, but an experienced bankruptcy lawyer will know how to take the right action. That’s why it’s important that you keep any court documents you receive regarding any of your debts, and tell your lawyer about any law suits against you. Your lawyer can search court records and order a title search on your home, but these cost extra money and can delay the filing of your bankruptcy.
There’s one more thing to think about. If you have been sued by a creditor, and the creditor claims that you committed fraud or intentionally harmed the creditor financially, it is very important NOT to let a judgment be entered against you. Again, it’s best to consult with a lawyer as soon as you receive court documents, rather than let them grow into a problem.