Bankruptcy is a complicated and stressful process to go through, no matter who you are. When bankruptcy is looming, there is every chance that you have judgments held against you due to prior court decisions and debts that haven’t been paid.
Fortunately, sometimes bankruptcy can negate judgments that are being held against you.
Here we’ve given you a brief overview of bankruptcy and how it can affect court judgments related to debt. Note that we can only give you a broad perspective of the legal situation, so your specific circumstances may differ.
That’s why you should always consult legal professionals to make sure you and your assets are safe. By reading this, you can have an idea of what to expect.
When it comes to reorganizing or discharging debts, Chapter 7 and Chapter 13 bankruptcies are the most relevant.
First, understand the fact that lawsuit judgments come in different types, so there’s another factor here to consider. Not all judgments are the same and so not all judgments can be discharged in the event of bankruptcy.
That said, Chapter 7 and Chapter 13 bankruptcy offers the most leniency when it comes to discharging or altering debts that have gone to court and resulted in a judgment issued against you.
For those who don’t know, Chapter 7 bankruptcy is the bankruptcy that many people know. It’s sometimes called straight bankruptcy and is where somebody has financial obligations, typically debts, that are overwhelming them.
In this situation, your debts are wiped so you can get a fresh start, usually at the cost of your assets.
Chapter 13 bankruptcy is known as reorganization bankruptcy and is where a repayment plan is drafted based on your current income.
The idea is that you eliminate as much debt as possible in the next three to five years without sacrificing assets, and then the remaining debt may be discharged.
With that in mind, let’s take a look at how bankruptcy can get rid of judgments.
Bankruptcy can get rid of judgments but that doesn’t mean it’s a guarantee. If your bankruptcy has been brought about by outstanding debt, you probably already have lawsuit judgments standing against you.
If you haven’t paid any personal loans, credit card debt, or medical bills, then the associated creditor can file for breach of contract and bring a lawsuit against you, the debtor.
If you lose the resulting lawsuit or you ignore it entirely, the court will place an order against you that demands you pay the debt you owe and other costs, typically filing and attorney fees.
To pay that money back, the creditor can take from your account, take a slice of your wages, or take assets that you own.
Whether the debt can be eliminated in the event of bankruptcy depends on whether the debt is dischargeable or non-dischargeable.
After you have filed for bankruptcy, the court handling those proceedings will enter a stay that ceases all collection efforts undertaken by the creditor.
This is a temporary measure to stop them from contacting you for repayment, wage garnishment, repossession, foreclosure, or eviction while the court takes account of your finances.
Once the bankruptcy process is reaching its end, court judgments will be assessed to see which debts can be discharged and which ones are non-dischargeable.
These debts can typically be discharged:
Credit card debt
Overdue utility bills
Personal debt to friends, family, and other private citizens
And these are the debts that cannot be discharged:
Debt related to driving when drunk
Fines or restitution for criminal acts
Certain debt based on unpaid taxes
Of course, sometimes there isn’t a clear dividing line on which debts are dischargeable and non-dischargeable. Through communication with the court and the relevant creditor(s), any unknowns in which debts can be discharged or not will be decided and made known to you.
Sometimes the creditor can object to dischargeable debt and, if the court approves, then it’ll become non-dischargeable.
This is common for financial obligations resulting from criminal actions, particularly malicious injury charges or cash/goods that have been acquired through fraudulent actions.
Bankruptcy may not clear everything about a judgment, even when most of the associated debt is dischargeable. If your judgment includes a lien against your property, keep reading.
In some states, creditors can use judgments to claim a lien against your property. If you don’t know what judgment liens are, they work a lot like a car loan or a mortgage, where the car or house is a secured asset that’s used as collateral.
The creditor gets the right to your property, often all of it. This makes it a powerful tool for creditors but it can still be stopped.
The original debt needs to be dischargeable to stop any liens that could seize your property. As always, creditors can ask the court to turn dischargeable debt into non-dischargeable debt but this is typically done for situations involving crime.
If the debt remains dischargeable, you’ll need to make a separate filing to get a lien avoidance action. This will wholly or partially remove the lien.
To get the bankruptcy court to approve this, you need to prove that equity tied up in the property is affected by the lien and that the equity is exempt from bankruptcy.
Lastly, you should get some official legal advice to make sure your situation applies to many of the circumstances outlined above.
While we can broadly describe the legal framework around bankruptcy and how it may affect judgments, there may be local legislations at play that we can’t account for.
Lawyers specializing in bankruptcy will be able to properly guide you on your next steps and the options you should take to minimize financial harm to your assets.
Bankruptcy is a complicated process, so you should have a qualified professional at your side when going through it.