A common question is whether a bankruptcy clears a judgement. Personal judgments are the result of a legal action against a person seeking compensation for a debt or other obligation. A judgment can create financial hardship for an individual. The person holding the judgment can try to enforce the judgment by seizing property to satisfy the judgment or requesting a wage garnishment order.
Many people who have personal judgments against them seek relief by filing bankruptcy under Chapter 7 or Chapter 13 of the Bankruptcy Code. Let’s take a closer look at how judgments work and how a bankruptcy case can help you get rid of judgments.
How Do Judgments Work?
Filing a Complaint
In most states, a party must file a complaint with the court seeking relief for a disputed matter. For instance, if you owe money on a credit card account or a medical account, the creditor files a complaint asking the court to enforce the debt. You are served with a copy of the complaint.
Responding to the Complaint
You have two choices. If you ignore the complaint, the court grants a default judgment granting the relief sought in the complaint. The relief is typically a monetary judgment against you. In addition to the money you owe for the debt, the court may add additional amounts for attorneys’ fees, court costs, and interest. Therefore, the amount of the judgment may be much higher than the debt you owed to the creditor.
If you respond to the complaint, you must file a response or answer with the court before the deadline given in the summons. Most states allow 20 to 30 days to respond to a complaint. It is crucial that you know the exact deadline. If you do not file your response before the deadline, the court may grant a default judgment, even if you file a response after the deadline.
After Filing Your Answer
After you file your answer, the court sets a hearing date. You are not required to hire an attorney, but it can be beneficial to have an attorney working on your behalf. An attorney understands the various defenses you may use to avoid a judgment. An attorney also understands the court process and how to investigate and gather evidence that could be used to win the case.
At the hearing, each side presents the facts and arguments they believe supports their position. If the other party proves its case, the judge can order that you compensate the party for the amount you owe plus other costs and fees. A judgment is entered on the record and filed with the clerk of court.
The laws of each state vary slightly regarding how long a judgment remains active. In many cases, judgments remain active for at least ten years. Active means that you have a legal obligation to pay the debt and the party that you owe can take further legal action to collect the debt. In some states, a party can renew the judgment for an additional period to keep it active.
Collecting a Judgment
The laws for collecting a judgment also vary by state. For instance, some states allow judgment holders to garnish a person’s wages to satisfy the judgment. In other states, a judgment creditor can seize certain property to satisfy a debt. Before seizing property, state law typically requires a court review of the person’s property to determine if state exemptions protect the property.
The urgency to file a bankruptcy case to resolve a personal judgment typically depends on how aggressively a party is permitted to collect a judgment under your state’s specific debt collection laws.
What Happens to Judgments in Chapter 7 bankruptcy?
Most personal judgments are dischargeable (forgiven) in a Chapter 7 bankruptcy case. When you file Chapter 7, you list the judgment holder in your bankruptcy forms. The judgment holder receives notice of the bankruptcy from the Bankruptcy Court. The party may object to the discharge based on bankruptcy laws. However, only certain judgments are non-dischargeable in bankruptcy.
Examples of personal judgments that are not dischargeable in bankruptcy include judgments related to:
- Restitution for a crime victim;
- DUI accident cases;
- Fines and criminal penalties;
- Student loans;
- Alimony or child support;
- Intentional and malicious injury to another person;
- Debts created through false pretenses, fraud, or misrepresentation; and,
- Debts owed to the government, including most tax debts.
Judgments for medical debts, credit card bills, business debts, breach of contract disputes, and personal loans are usually dischargeable in Chapter 7 and Chapter 13.
What Happens to Judgments in Chapter 13 bankruptcy?
In a Chapter 13 case, the same rules regarding the discharge of a judgment debt apply. Priority unsecured debts are not dischargeable, You must pay the debt in full through your Chapter 13 bankruptcy case. Therefore, if the judgment is related to a priority unsecured debt, your Chapter 13 plan is calculated to pay the debt in full.
Judgment debts that are unsecured and eligible for discharge are not paid in full. The creditors receive the same percentage as your other unsecured debts. At the end of the bankruptcy case, your legal liability to repay the debt is discharged.
Releasing Liens Against Property
Depending on state law, a judgment creditor may hold a lien against your property. While some property is exempt from collection efforts, all property might not be exempt. A bankruptcy discharge does not remove a lien against property. Therefore, you may need to take an additional step to remove the lien created by a personal judgment. In many cases, filing a motion with the court to receive an order removing the judgment lien is all that is necessary.
Do You Want More Information About Bankruptcy?
If you are interested in a bankruptcy case, you can find additional information in our Chapter 7 Guide and Chapter 13 Guide. You can also see if you qualify for Chapter 7 by using our Chapter 7 bankruptcy means test calculator. We also have a Chapter 13 calculator to help you estimate what you would pay through a Chapter 13 repayment plan.