Most creditors must file a lawsuit and get a judgment against you before taking additional steps to force you to pay what you owe, such as emptying your bank account or deducting money from your paycheck. So if you allow your credit card payment to lapse for an extended period, you can expect your creditor to up the debt collection ante and take you to court—especially if you owe a significant amount of money. If the creditor wins the lawsuit, you might be able to get rid of the judgment in bankruptcy—but not always. It’s important to evaluate your options—and possibly file your bankruptcy—before the court rules against you.
(If you’d like to know what to expect during the litigation process, read Delinquent Debt Lawsuit: What to Expect When a Creditor Sues You.)
Some Judgments Won’t Go Away in Bankruptcy
After losing a court battle, many people consider filing for bankruptcy because it can solve the situation quickly. However, you should know that not all judgments can be discharged (wiped out) so it might—or might not—take care of the problem. For instance, if the court finds that you committed a wrongdoing—something other than failing to pay a bill—bankruptcy won’t help. Specifically, you won’t be able to discharge:
- a judgment resulting from embezzlement or fraud
- a judgment due to the death or injury of another as a result of driving while intoxicated, or
- a money judgment arising from a willful or malicious injury to a person or property (purposeful damage or harm).
Filing for Bankruptcy Before Receiving a Nondischargeable Judgment
If you get served with this type of lawsuit, you might stand a better chance of avoiding a nondischargeable judgment by filing for bankruptcy early in the case. Not only will doing so stop the trial, but you’ll be off the hook unless the plaintiff (the person suing you) files and wins a new action in bankruptcy court. If you’d like to learn how likely it is that the plaintiff will pursue you in bankruptcy, read Will Filing for Bankruptcy Stop a Civil Lawsuit?
Filing for Bankruptcy After Receiving a Nondischargeable Judgment
If you have other debt or need time to pay the judgment, filing for bankruptcy might provide relief. The chapter you choose will depend on your particular needs.
Chapter 7 bankruptcy. Filing for Chapter 7 bankruptcy can help by wiping out other qualifying debt. Although you’ll remain responsible for the judgment after receiving your discharge, you should have more available funds to pay it off.
Chapter 13 bankruptcy. If you have sufficient income to pay the judgment over time, a Chapter 13 case might help you accomplish this goal. During your three- to five-year repayment plan, the automatic stay—the bankruptcy order that prevents creditors from collecting against you—will stop your creditors from taking collection actions against you. You won’t have to worry that someone will attach your wages (wage garnishment), drain your bank account (bank levy), or take your property (seizure).
Judgments You Can Discharge in Bankruptcy
If you have a dischargeable judgment, you aren’t necessarily out of the clear. The usefulness of the bankruptcy process depends on additional factors, including the timing of your bankruptcy filing and the amount of property that you own. For instance, bankruptcy will likely help if:
- you don’t have a lot of assets
- the property you own is exempt (your state exemption laws allow you to keep it)
- the creditor hasn’t recorded the judgment in the recorder’s office, and
- the obligation is an ordinary consumer debt, such as a credit card balance or medical debt.
Bankruptcy timing and property liens. It’s almost always a good idea to file for bankruptcy before litigation ends, if possible. If not, you’ll want to file your case shortly after the court enters a judgment against you. The creditor can gain an ownership interest in your property by recording the judgment in the county recorder’s office (or similar office). The creditor’s filing will create a lien, and once it attaches, the creditor will retain the ability to take your property even if the debt gets wiped out in bankruptcy.
Keep in mind that if all of your bankruptcy property is exempt, your attorney should be able to file a motion asking the bankruptcy court to remove the lien.
(For further details, read Secured Claims and Liens in Bankruptcy.)
Example 1. Robin immediately filed for Chapter 7 bankruptcy after her creditor filed a lawsuit seeking a $10,000 judgment. Robin was able to fully wipe out the $10,000 account and all future liability on the debt because, without a judgment, the lawsuit had no impact on the bankruptcy case.
Example 2. George incurred $50,000 in medical bills after becoming sick. The medical provider filed a lawsuit to recover the amount, received a judgment, and filed it with the county recorder’s office. After recovering, George got his medical bills wiped out in Chapter 7 bankruptcy, and even though the lien attached to his property, he was able to protect it all under his state’s exemption laws. The judge granted the motion filed by his attorney asking the court to wipe out the lien. If George had filed his case prior to receiving the judgment, the motion would not have been necessary.
Example 3. Ashley, a real estate agent, did well financially while the market was hot. When the economy took a turn, she found herself saddled with debt, including unpaid income taxes. After her credit card company took her to court, won a $50,000 judgment, and recorded it with the county recorder’s office, she sought bankruptcy advice. She learned that because she had nonexempt equity in her home, the bankruptcy trustee—the person tasked with overseeing the case—would sell the home and use the nonexempt proceeds to pay the judgment. The remaining amount would pay a part, but not all, of her tax debt—a nondischargeable debt that she’d remain liable for after bankruptcy. Filing for bankruptcy after the lien attached cost her money. If she’d filed before the lien attached, the credit card debt would have been wiped out in full, and the trustee would have paid off the entire tax bill.
Be aware that a lien can affect your property in complex ways, and addressing all consequences is beyond the scope of this article. If you’re being sued, you’ll want to seek the advice of an attorney.
Questions for Your Attorney
- Should I file for bankruptcy before the court enters a judgment against me?
- Can you tell me whether a lien has attached to my property?
- Would a Chapter 7 or Chapter 13 bankruptcy be best for me?