Filing for bankruptcy relief will discharge most of your debts, including lawsuit judgments. But exceptions exist. Whether your bankruptcy will discharge a lawsuit judgment will depend on:
The majority of lawsuit judgments against bankruptcy debtors involve unpaid debts. If you don't pay your credit cards, medical bills, or other personal loans, the lender or creditor can bring a breach of contract lawsuit against you. If your lender obtains a judgment, it can garnish your wages or go after your assets to satisfy the outstanding judgment.
Fortunately, filing for bankruptcy can stop the garnishment and wipe out your obligation to pay back discharged debts. If a lawsuit is still pending, the bankruptcy's automatic stay will prevent it from moving forward. However, even if the lawsuit resulted in a judgment, the bankruptcy will eliminate your liability as long as the debt qualifies for discharge. But keep in mind that if the judgment is for a nondischargeable debt, bankruptcy will not get rid of it (discussed below).
Certain types of debt can't be discharged in bankruptcy. If a creditor obtains a judgment against you for a nondischargeable obligation, filing for bankruptcy will not discharge that judgment. Some of the most common types of nondischargeable judgments include those related to or arising out of:
When you receive a bankruptcy discharge, it wipes out your liability for all discharged debts. You will no longer be obligated to pay those debts, and creditors can't sue you personally to collect them. However, simply filing for bankruptcy does not automatically remove any liens that were placed on your property before filing your case.
If a creditor obtains a lawsuit judgment against you, it can enforce that judgment in different ways, including garnishing your wages, levying your bank accounts, or placing liens against your properties such as your house. If a judgment lien has been placed on your property, you must file a motion with the court to remove it. Learn more about lien avoidance in bankruptcy.
Your mortgage lender typically has a lien on your house (your car lender has one on your car). If you default on the loan, the lender can sell your house through foreclosure or auction off your car after repossessing it. If the sale doesn't bring in enough money to pay off the outstanding mortgage or car loan balance, the remaining amount is called a deficiency. Depending on the laws of your state, your lender may be able to sue and obtain a judgment against you for the unpaid deficiency balance.
If your lender gets a deficiency judgment against you, it can enforce the judgment by garnishing your wages, levying your bank accounts, or placing liens on your property. Filing for bankruptcy relief can wipe out your personal liability for a deficiency judgment. How the deficiency judgment will be treated in bankruptcy depends on whether you file for Chapter 7 or Chapter 13 bankruptcy.
Unless your lender has placed additional liens on your other assets after obtaining the deficiency judgment, the judgment is no different than any of your other general unsecured debts (such as credit card debt or medical bills). Your bankruptcy discharge will wipe out your obligation to pay back the deficiency judgment.
However, if the lender placed a lien on any of your properties using the deficiency judgment, Chapter 7 bankruptcy will not automatically remove that lien (your discharge only eliminates your personal liability for debts). In that case, you will have to file a motion and ask the court to avoid the lien.
Just like in Chapter 7, deficiency judgments are treated as unsecured debts in Chapter 13 bankruptcy unless your lender placed a lien on any of your assets before filing. Your lender will only receive a pro-rata share of the amount going to your unsecured creditors through your Chapter 13 repayment plan. When you complete your Chapter 13 plan, the deficiency judgment will be discharged.
Your lender doesn't always have an automatic right to come after you for a deficiency balance. Most states permit car lenders to pursue borrowers to collect auto loan deficiencies. When it comes to mortgage loans, deficiency laws can be complex and differ significantly from state to state.
In general, whether your mortgage lender can come after you for a deficiency depends on:
Some states only allow a single collection action (such as foreclosure or a lawsuit but not both) or prohibit mortgage lenders from suing borrowers for a deficiency altogether. However, in many states (called deficiency states), mortgage lenders can obtain deficiency judgments against you after foreclosure.
Not all judgment liens can be removed through bankruptcy. Whether you’ll be able to remove a judgment lien will depend on the value of the property, the amount of the lien and other encumbrances on the property, and your state's exemption laws. Because the rules and procedures regarding lien removal can be complex, if you have liens on your property, consider talking to a knowledgeable bankruptcy attorney in your area before filing your case.