Can You File Bankruptcy on a Judgment?

Debts come in many forms, and bankruptcy does not treat them all the same. Before filing before bankruptcy, you should be sure that the type of debt you have will be included in the process. Otherwise, you may still owe that debt even after bankruptcy is completed. One such debt that many people worry about are judgments. 

What Is a Judgment?

A judgment, also called a civil judgment, is a legally binding court order that formally establishes a debt and the amount owed.It is never a good idea to ignore a judgment, as it allows the creditor to take legal action to collect the debt if the debtor fails to pay. Such legal action can include garnishing the defendant’s wages and bank account or filing a lien on the defendant’s property in order to receive what they are legally owed. Judgements usually arise from civil lawsuits, such as those for fraud, personal injury, malicious injury, and more.

Understanding Lawsuits for Unpaid Debts

A lawsuit for unpaid debt usually does not happen after you’ve missed a single payment.More often than not, they are the culmination of months, or even years, of missed payments. They will only happen after all others of debt collection have been exhausted and proven to be ineffective. Lawsuits are not cheap and thus are usually reserved for debts in the range of thousands of dollars. If a lawsuit results in a judgment and you continue to not pay, there can be serious consequences. This can include:

• Wage garnishment
• Bank account levies
• Property liens

These consequences have the potential to financially ruin you. For this reason, a lawsuit for unpaid debt should be taken very seriously.

Does Bankruptcy Clear Judgments?

Bankruptcy does have the potential to clear judgments. However, there are certain caveats to this. If the judgment is considered nondischargeable, it will not be included during bankruptcy. Nondischargeable judgments include judgments arising from fraud, malicious injury, or certain government debts. This applies to both chapter 7 and chapter 13 bankruptcy. Under chapter 7, judgments will be discharged just as any other debt. Under chapter 13, they will be discharged at the end of your payment plan. 

How Bankruptcy Affects Judgments

Judgments are affected immediately once the bankruptcy process begins. Once you file for bankruptcy, an automatic stay is put in this place. This puts a stop to all collection actions. This includes any wage garnishments that are in place due to a judgment. It is also worth noting that the automatic stay will also stop any in-process debt lawsuits against you. This does not mean that you do not owe the debt, just that it will be included in the bankruptcy, rendering the lawsuit unnecessary. 

Nondischargeable Debt

The point of bankruptcy is to discharge debt. However, not all debt is the same, some debt is considered nondischargeable. This means that bankruptcy will have zero effect on it and you will still owe this debt after the bankruptcy process is completed. Nondischargeable debt includes:

• Judgments arising from fraud, malicious injury, or certain government debts
• Federal, state, and local tax debts, especially those incurred within the last three years
• Domestic support obligations, such as alimony and child support
• Student loans
• Fines and penalties
• Any debts that were not properly listed on the bankruptcy petition, even if they would usually be dischargeable
• Debts arising from embezzlement, Larceny, or Breach of Fiduciary Duty

It is important to understand which debts are considered dischargeable and which are not. You do not want to mistake a debt for dischargeable and stop paying it, as this will only worsen the financial situation you are trying to fix through bankruptcy.

Can You Still File Bankruptcy After a Judgment?

Once a judgment is made or a lawsuit is started, your instinct may be to file bankruptcy immediately. Fortunately, in Pennsylvania, you can begin filing bankruptcy after a judgment. It can actually be best to do this before the lawsuit even becomes a judgment. This is because filing for bankruptcy  stops lawsuit proceedings when an automatic stay is put into effect. For this reason, those owing debt that they cannot repay in the midst of a lawsuit may consider this option.  It can eliminate or reduce the amount to be paid. Alternatively, it can provide a significant amount of time to repay the debt without losing assets if you file for chapter 13 bankruptcy. 

Lastly, even though a judgment is rendered void by a bankruptcy discharge, a judgment lien is not automatically eliminated by a discharge of debts.  A separate legal proceeding is required to avoid a judgment lien.  

A bankruptcy attorney can help you decide if filing for bankruptcy mid-lawsuit is the right choice for you.