My Creditor Has Sued and Gotten a Judgment Against Me. Is It Too Late to File Bankruptcy?

Can Court Judgments Be Discharged in Bankruptcy?Among the many common myths about bankruptcy I hear from prospective clients seeking bankruptcy advice is the notion that once a credit card or other bill collector sues and obtains a court judgment on a debt, it may be too late to file bankruptcy. This is simply not true. Unless the judgment includes causes of action for fraud against the debtor—which is relatively rare in suits to collect on credit card debt—debts that have resulted in a judgment can be discharged in bankruptcy just the same as debts that have not yet resulted in a law suit.

This is not to say that one should delay filing for bankruptcy when creditors sue. If you own a home in California, and a creditor obtains a judgment against you, that creditor will record an Abstract of Judgment, which creates a judgment lien against your California real estate. In Chapter 7 bankruptcy, we can file a motion to avoid that judicial lien and remove it from your property, but only to the extent that the lien “impairs” your California homestead exemption. For example, if you have a judgment lien against your home in the amount of $20,000, and you have $75,000 of equity protected by the California homestead exemption, then such a judicial lien can be removed in your Chapter 7 bankruptcy because the lien impairs that protected equity.

However, if you have no equity in your home, or if the property affected is not your primary residence, the judicial lien cannot be removed in bankruptcy. Even though the judgment debt will be discharged in Chapter 7 bankruptcy, the lien will remain. As strange as this may sound, even though the creditor cannot collect that discharged debt by any other means, such as wage garnishment or levy against any other asset, the lien will continue to encumber the property it was originally recorded against. Such property cannot later be sold without satisfying the debt. Thus, even though debts can be discharged in bankruptcy even after the creditor sues and obtains a judgment, it is preferable to file bankruptcy before the creditor is able to record a lien against your home.

What about wage garnishments? Can bankruptcy stop a wage garnishment? While some wage garnishments may be unaffected by bankruptcy if the debt is not dischargeable, such as those for court ordered child or spousal support, garnishments resulting from judgments for common consumer debts like credit cards or medical bills will be stopped by the bankruptcy automatic stay. In fact, wages garnished for such consumer debts within 90 days prior to the bankruptcy filing can often be recovered by our bankruptcy attorneys provided that if such wages came back to the debtor, they would be exempt from the Chapter 7 bankruptcy estate.

For a variety of reasons, it is generally preferable to file bankruptcy before your creditor obtain a court judgment against you. However, provided that such debts would otherwise be dischargeable, it is not too late to seek bankruptcy debt relief just because your creditors may have already gotten a judgment.  If a creditor has served you with a lawsuit, right now would be the best time to contact our San Jose bankruptcy attorneys for a free consultation.

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