Are Lawsuit Judgments Discharged by Bankruptcy?

Filing for bankruptcy relief will eliminate or "discharge" most of your debts, including lawsuit judgments. But exceptions exist. Whether your bankruptcy will erase your liability to pay a creditor with a lawsuit judgment will depend on the judgment type and whether the judgment creditor has placed a lien on your property.

How Creditors Obtain and Use Judgments

Most lawsuit judgments involve unpaid debts not secured by collateral, like credit card balances, unpaid rent, personal loans, and utility bills. If you stop paying, creditors holding these debts are limited to asking you to pay.

Before forcing you to pay, the lender must file a lawsuit and win a money judgment for the amount owed. The money judgment allows the lender to “garnish” or deduct wages from a paycheck, “levy” or remove funds from a bank account, and seize property.

A lender can also use a judgment to place a lien on your property. The lien protects the creditor’s interest by preventing a debtor from transferring a clear title to a new owner without first paying the lien. In some states, a money judgment automatically gives the creditor a lien on the debtor’s personal property.

Bankruptcy Eliminates Most Collection Judgments

The benefit of filing for bankruptcy is that the discharge wipes out your responsibility to pay qualifying debts, like credit cards, medical bills, and personal loans. Once discharged, creditors lose the right to sue you personally or use an existing money judgment to collect the debt.

Filing for bankruptcy also stops ongoing garnishments and pending state court collection lawsuits. However, sometimes, a bankruptcy court needs a court judgment to determine whether a debt is or isn't dischargeable. A fraud-related debt would be a good example.

In that case, if significant fraud litigation had already occurred in state court, the creditor would file a motion asking the bankruptcy court to lift the automatic stay to allow the state court action to go forward. Bankruptcy courts usually grant such requests and agree to accept the state court determination. Otherwise, the creditor would need to file and win an action in bankruptcy court to prevent the debt from being discharged.

Bankruptcy Discharges Deficiency Judgments

You can also eliminate a “deficiency judgment” in bankruptcy. A “deficiency” is the amount remaining when a lender forecloses a home or repossesses a car and sells it for less than you owe.

Depending on the laws of your state, your lender might be able to sue and obtain a judgment for the unpaid deficiency balance. Most states permit car lenders to pursue borrowers for auto loan deficiencies.

Many states—called “deficiency states”—allow mortgage lenders to obtain deficiency judgments against you after foreclosure. However, some states only allow a single collection action, such as foreclosure or a lawsuit, but not both. Others prohibit mortgage lenders from suing borrowers for a deficiency altogether.

A creditor can usse a deficiency judgment in the same manner as a collection judgment to recover the outstanding amount owed.

Bankruptcy Won’t Erase All Money Judgments

If a creditor obtains a judgment against you for a "nondischargeable debt," filing for bankruptcy won't eliminate your responsibility to pay the judgment amount. Some of the most common types of nondischargeable judgments include those for:

• domestic support obligations such as child support and alimony
• criminal penalties, fines, and restitution
• certain taxes
• student loans
• debts acquired by fraud, misrepresentation, or false pretenses
• willful and malicious injury caused by the debtor, and
• death or injury caused by the debtor's drunk driving.

Bankruptcy Won’t Remove Judgment Liens Automatically

If a creditor used a state court judgment to place a lien on your property before the bankruptcy filing, you could have a problem. The bankruptcy discharge won’t affect the lien, even if the debt is dischargeable. The lien will remain unless you file a motion to remove it—and even then, you can only remove the lien to the extent that it impairs a bankruptcy exemption.

For instance, suppose the creditor placed a lien on your house for $75,000, and your state has a $50,000 homestead exemption. The court would allow you to avoid $50,000, but a lien for $25,000 would remain. Learn more about lien avoidance in bankruptcy.

A simple way to prevent issues with judgment liens is to file for bankruptcy before a creditor receives a state court judgment. Also, if you forget to remove a judgment lien during bankruptcy, most bankruptcy courts will let you reopen the case and file the avoidance motion.

Because lien removal rules and procedures are complex and depend on many factors—the property's value, the lien amount and other encumbrances, and your state's exemption laws—consider talking to a knowledgeable bankruptcy attorney before filing your case.