Can You File For Bankruptcy to Avoid Paying a Judgment?
Filing for bankruptcy is one option people have for handling debt or restructuring payments they are struggling to make. Unlike working directly with creditors, bankruptcy affords an individual or couple legal protections on both the state and federal levels that limit their creditors’ options. You can file for bankruptcy to pay back a delinquent mortgage, discharge medical debt or credit card debt, and, in some cases, avoid paying a judgment.
If you have a judgment against you, that means a creditor filed a lawsuit and obtained a court order indicating that you were legally required to pay the debt. A judgment grants a creditor legal options to collect the debt, including garnishing wages, accessing your bank account, or placing a judgment lien on your home. How the judgment will be treated in bankruptcy depends on a number of factors.
The Bankruptcy Code is complicated, so it is critical to speak with our experienced Philadelphia bankruptcy attorneys to understand how it could benefit your situation. While it is advisable to file for bankruptcy before a judgment is entered, you still have options after the fact. Call Young, Marr, Mallis & Associates in Pennsylvania at (215) 701-6519 or New Jersey at (609) 755-311 to discuss the advantages of filing for bankruptcy.
What is a Judgment?
A judgment is a court order. If you borrowed money or were extended credit, you are legally required to repay the debt either through a series of payments or one lump sum. You could also fall into debt with service providers, including utility companies, cell phone providers, medical professionals, or other service providers. Once the service is rendered, you are legally obligated to pay for what you received.
When you fail to pay a bill or debt, the creditor has the right to take action to collect the outstanding balance, such as calling you or sending letters demanding payment. The most powerful option is to file a collection lawsuit against you in court. If the lawsuit is successful, the court will enter a judgment in favor of your creditor against you.
Your creditor can now use the judgment to legally require you to make payments. What options are available depends on the state laws where the judgment was entered. For example, in Pennsylvania, a creditor is not permitted to garnish your wages. However, they are granted a judgment lien on your real property and could freeze your bank accounts. Meanwhile, in New Jersey, your wages could be garnished. As a debtor, the defenses available after a judgment is entered are very limited.
Chapter 7 Bankruptcy and Judgments
When you file for bankruptcy, you are protected immediately by an automatic stay. This injunction stops creditors from acting on their legal rights, even those gained through a court-ordered judgment. Therefore, any wage garnishment would stop and, if your bank account were frozen, you would have access to it once again.
What happens to the judgment after you file depends on whether you filed Chapter 7 or Chapter 13, the type of debt, and your assets and income.
A Chapter 7 bankruptcy is designed to quickly eliminate debt if you have limited income and assets. If you qualify for Chapter 7 and do not own a home, any judgment against you will be discharged. For example, if a hospital had a judgment based on an outstanding medical bill of $15,000, the debt would be discharged and the judgment removed.
Avoiding Judgment Liens
Homeowners in Pennsylvania have a potential issue. When a judgment is entered, your creditor obtains a lien on any real property, including your home. This means that, in addition to your mortgage, you will have another secured debt attached to your property. When you sell your home, you will be required to pay whatever is owed under the judgment, including any accrued interest. The lien is not automatically removed through bankruptcy.
Our Pennsylvania chapter 7 bankruptcy attorneys would have to file a motion to avoid the lien. However, the judgment lien must impair the exemption on your home before you are eligible to avoid it. In most Chapter 7 cases where a home is involved, the lien will impair the lien.
When you file for bankruptcy, you must exempt your home if you want to keep it. The current homestead exemption under federal law is $25,150 (doubled for married couples). This means you can exempt $25,150 of equity in your property. If your home is worth $200,000 and your mortgage balance is $175,000, you have $25,000 of equity in the property. You can exempt the $25,000 of equity through the federal exemption. Now suppose there was a $30,000 judgment lien on your home. Because you have no non-exempt equity in your home, the judgment lien would impair your exemption. Therefore, the lien could be avoided through a motion filed in your case.
Chapter 13 Bankruptcy and Judgment Liens
People file for Chapter 13 for a variety of reasons. If you are filing because your income is too high or you have non-exempt assets you wish to keep, you will most likely have to pay any judgments through your bankruptcy plan. However, if you qualify for Chapter 7 but were filing Chapter 13 to stop a mortgage foreclosure or payback an outstanding tax debt, you probably could avoid any judgment liens against your home. Our experienced Chapter 13 bankruptcy lawyers will thoroughly review your case so you understand your options.
Our Experienced Bankruptcy Attorneys are Available to Answer Your Questions Regarding Judgments
Just because a creditor sued you in court and won does not mean you are out of options. Bankruptcy provides people overwhelmed by debt a means to achieve a fresh start. Our Pennsylvania bankruptcy attorneys are available to review your circumstances and offer you options. Call Young, Marr, Mallis & Associates in Pennsylvania at (215) 701-6519 or New Jersey at (609) 755-311 to schedule a free appointment.