Bankruptcy Treatment of Default Judgments

By Tom Streissguth

If you've filed for bankruptcy protection, you benefit from an automatic stay of collections by your creditors. This stops any pending lawsuits against you; at the end of the case, the court will discharge (cancel) your debts. If a default judgment is in effect when you file the bankruptcy, the debt may be discharged -- but there are conditions and exceptions.

Default Judgments

If you're the defendant in a civil lawsuit over debt and you fail to respond or appear for a scheduled hearing, the court will normally issue a default judgment in the plaintiff's favor. This effectively closes the case and allows the plaintiff to proceed with legal remedies, including garnishment of wages, bank levies and liens on your property. You can move to have the judgment vacated, but will have to show good cause for your failure to respond to the suit.

Pre-Petition Debts

When you file for bankruptcy protection, you're requesting the protection of the court against lawsuits and collection actions. If the default judgment was entered before you filed, it is classified as "pre-petition" debt and becomes part of the bankruptcy "estate" that includes your liabilities and non-exempt assets. As part of a bankruptcy filing, you must list the judgment and outstanding balance owed on a form. In Chapter 7, a court-appointed trustee liquidates your non-exempt property to pay your creditors. In Chapter 13, a trustee sets up a partial repayment schedule, which will include your judgment creditor.

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Discharging Debts

If the judgment debt is dischargeable, you can lose it in bankruptcy. But if the judgment relates to non-dischargeable debt, that liability is not going anywhere and you will still owe any unpaid balances in full when the bankruptcy case ends. This class of debt includes child support, alimony, back taxes, student loans, the proceeds of fraud, and criminal fines and restitution. In addition, any "post-petition" default judgments on debts you incur after filing the bankruptcy petition are legally enforceable, whether the debt is classified as dischargeable or not.

Vacating the Default

A bankruptcy court can discharge debt, but you must move the original civil court to vacate, or set aside, the default judgment. This is a common outcome for judgments relating to credit card balances, medical bills, installment loans, and secured debt such as car loans (if the collateral is worth the same or less than the bankruptcy exemption amount). The bankruptcy stay will also put an end to bank levies and garnishments. However, a property lien created by the default will survive, and you will need to file for a release of the lien with the recorder of deeds or other appropriate agency.

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References

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Your landlord may not automatically evict you from your apartment just because you sought bankruptcy protection from your creditors. Your ability to keep your apartment depends on the type of bankruptcy that you file, the status of your rent payments to your landlord, and whether you keep your lease. Bankruptcy, however, does not prevent your landlord from removing you from the rental unit if eviction procedures were initiated before you filed your bankruptcy petition.

Chapter 7 Relief of Stay

In a Chapter 7 bankruptcy, a debtor petitions the court for protection from lawsuits and collection efforts. As soon as the petition is filed, the court grants an automatic stay. This is a legal restraining order that goes out to all creditors whom the debtor has listed on the petition. The stay has the effect of immediately suspending collection actions, and preventing any new actions while the bankruptcy is in progress. Creditors may request relief from the stay, which the court will grant if it has grounds to do so.

Motion to Avoid a Lien in Bankruptcy

A successful bankruptcy can be like a magic wand, eliminating your responsibility for paying debts. The wand can only affect debts, however, not liens created by them – they're two separate things. If you owe someone money and he goes to court and gets a judgment against you, and if he then uses the judgment to create a lien against your property, your bankruptcy discharge removes only your liability for the underlying debt. Removing the lien – called "avoiding" it in bankruptcy terms – involves taking an extra step.

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