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If a creditor has obtained a legal judgment ordering you to pay an outstanding debt, the nature of that debt determines whether bankruptcy can cancel it.
What Is a Judgment?
A judgment is a court order, issued in response to a creditor's suit against you, that declares you liable to pay what you owe them. A creditor with a judgment against you can do any or all of the following in pursuit of the money they are owed:
- Garnish your wages
- Take from your bank accounts
- Obtain a judgment lien against your property (real estate, vehicles, etc.), which could allow a creditor to seize the property, compel you to sell it, or entitle them to collect what they're owed from the proceeds when you sell the property voluntarily.
Judgments can be issued in all kinds of civil matters, including personal injury liability suits, small-claims cases and even property-boundary disputes—in any case where monetary damages can be assigned.
The most common judgments relevant to bankruptcy involve unpaid debts. Lenders, credit card issuers and other creditors may bring suit if you default on your accounts and secure judgments ordering you to pay what you owe.
The nature of the debt behind each judgment, and whether it is considered priority debt that cannot be discharged, will determine if bankruptcy can erase it.
Where Do Judgments Come From?
There are a variety of ways judgments can be rendered against you in response to creditor litigation or other legal actions.
- A confession of judgment is a document in which you acknowledge liability for the debt. Creditors often require you to sign one as a condition of entering a repayment plan, with the understanding that they will use it to secure a judgment if you don't stick to the plan.
- A judgment by default is the result of you failing to (or choosing not to) respond to a creditor's lawsuit.
- A judgment by consent occurs when you respond to a creditor's suit by accepting responsibility for the debt.
- A judgment after trial occurs when you and your creditor argue your case before a court, and the court finds you liable for the debt.
When you file for bankruptcy, holders of judgments against you are required to stop efforts to collect what you owe them, so any wage garnishments or collections from bank accounts must cease. Any pending lawsuits seeking judgments against you are also suspended, and typically dismissed or withdrawn upon completion of the bankruptcy process.
Is a Judgment a Dischargeable Debt in Bankruptcy?
The manner in which a judgment is obtained has no bearing on whether bankruptcy can eliminate it. What matters is if the debt or obligation underlying the judgment is subject to discharge through bankruptcy.
Both Chapter 7 (liquidation) and Chapter 13 (reorganization) bankruptcy can eliminate, or discharge, many consumer debts, including:
- Credit card debt
- Personal loans
- Overdue rent or bill payments
- Private debts to friends or family members
The attachment of a judgment to a debt does not change the debt's eligibility for discharge through bankruptcy, and judgments associated with debts such as these are typically eliminated in the bankruptcy process.
Debts are discharged in a Chapter 7 proceeding following the debtor's forfeiture of assets (with the exception of certain exempt items, typically including the debtor's primary vehicle up to a certain value). Debts are discharged in a Chapter 13 bankruptcy after the debtor completes the repayment plan imposed by the bankruptcy court.
Neither Chapter 7 nor Chapter 13 bankruptcy can discharge all debts, however. Obligations that cannot be eliminated through bankruptcy include:
- Child support and alimony
- Criminal fines
- Mortgages (which entitle the lender to seize the mortgaged property to recoup financial loss)
- Obligations incurred through negligence, fraud or other criminal acts
- Chapter 7 bankruptcy cannot discharge car loans, obligations to pay court costs or fees, or debts secured by liens (with certain exceptions).
- Chapter 13 specifically cannot discharge certain tax debts.
Student loan debt is not automatically subject to discharge through bankruptcy, but it can be eliminated through a process called adversary action, which is essentially a lawsuit filed inside a bankruptcy proceeding. Successful discharge of a student loan debt (and any judgments associated with it) requires that you show a good faith effort to repay the debt has been made, and that making additional payments would constitute a hardship for you or your dependents. In an adversarial action, the creditor is permitted to appear in court to challenge your claims, and the court rules on whether the debt can be discharged.
What Is Lien Avoidance?
Some judgment liens can be eliminated, or avoided in legal lingo, in the course of a bankruptcy. A judgment lien is avoided if it applies to property you claim as exempt from liquidation or forfeiture in your bankruptcy.
In a Chapter 7 bankruptcy, the debtor's primary vehicle is exempt from liquidation or forfeiture if it's worth less than your state's exemption limit. Any judgment lien against an exempted vehicle you own free and clear can be wiped out through bankruptcy.
Note that this is distinct from any claim to the vehicle retained by the issuer of the loan used to purchase it. If you are still paying off a loan on the vehicle, bankruptcy may eliminate your obligation to cover delinquent payments on that loan, but the lender's right to repossess the vehicle—a form of lien that's not dependent on a court order—still stands, and you may still lose the vehicle.
In a Chapter 13 bankruptcy, it's possible to avoid judgment liens against certain real estate holdings by claiming the real estate as exempt from consideration in the bankruptcy process. Doing so can be tricky, however, because it also eliminates any protection you may have against repaying outstanding debt owed on any mortgage on that property. Because of the potential complexity of claiming exemptions under Chapter 13, it's wise to consult with your lawyer, and perhaps a real estate professional, when considering your options.
Do Judgments Impact Your Credit?
For many years, judgments and liens appeared in the public records section of credit reports, but that is no longer the case. Bankruptcies are now the only public records collected and listed on credit reports maintained by the three national credit bureaus (Experian, TransUnion and Equifax).
Chapter 7 bankruptcies appear on your credit reports for 10 years from the date of the bankruptcy filing, while Chapter 13 bankruptcies remain for seven years from the filing date.
A bankruptcy negatively affects your credit score as long as it remains on your credit report, but its impact diminishes over time. Since judgments and liens no longer appear on credit reports, they have no effect on credit scores.
Legal judgments and their consequences, including garnished wages and drained bank accounts, can compound the distress of mounting debt. Filing bankruptcy is stressful in its own right, but it can bring instant relief from judgments, in many cases eliminating them permanently.