Does Filing Bankruptcy Erase Judgments From Creditors?
When a creditor wants to advance beyond phone calls and other routine collection attempts, they can file a law suit and receive a judgment. This allows them to pursue more vigorous methods of collection such as foreclosure, repossession, and garnishment. The risk to the creditor, however, is that the debtor will simply file for bankruptcy, because bankruptcy can erase judgments from creditors. This is not true of all judgments, though, and usually depends on the type of bankruptcy and the debt.
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Identification
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The term for removing a debtor's liability to a creditor is called a discharge of debt. The types of debts that can be discharged vary according to the rules for each bankruptcy chapter. Generally, most judgments from creditors can be discharged by filing either Chapter 7 or Chapter 13 bankruptcy. The law typically looks at the nature or cause of the debt judgment, not just the fact of its existence. Within certain limits, liens on wages, bank accounts and real estate that arise from judgments can be discharged.
Types
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There are two major distinctions that bankruptcy courts use to distinguish and identify debts. First, debt is either secured or unsecured. This refers to whether or not a specific item of property exists as collateral, which the creditor can repossess to satisfy the debt. Usually, only unsecured debt can be discharged in bankruptcy, though a debtor can renegotiate terms in Chapter 13 without necessarily losing the collateral property. Debts can also be designated as priority or nonpriority, with only nonpriority debts subject to discharge in bankruptcy.
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Priority Debts
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Bankruptcy courts will not discharge priority debts, whether a judgment has been issued or not. Priority debts include domestic support (such as child support, alimony and maintenance), tax debts, fines, penalties, court costs, restitution to a victim and homeowner's association fees. A few additional types of priority debt can be discharged only in rare cases in which the debtor can show a special exception. These include student loans and income taxes, which usually cannot be discharged in bankruptcy.
Objections
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Some debts that would ordinarily be dischargeable nonpriority debts might not be discharged if the creditor successfully objects. Fraudulent debts, which include those arising from dishonest action or false statements in obtaining a loan, can be objectionable. Fraud also includes the purchase of luxury items (over $550) within 90 days of bankruptcy. Also, a creditor can prevent discharge of a debt if the creditor can prove the act that caused a debt was both willful and malicious (such as kidnapping, libel, embezzlement, larceny, terrorism or other illegal acts).
Nonpriority Debts
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With the exception of the debts and conditions already described, most other forms of unsecured debt can be discharged in bankruptcy despite the presence of a judgment from creditors. This includes credit card debts and medical bills, and judgments that result in garnishment of wages or liens on a bank account. A judgment that produces a lien on a home can be reduced or eliminated to the extent homestead exemptions permitted under your state bankruptcy laws protect the home's value.
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