Can a Lien on My House be Discharged in Bankruptcy?
My Creditor Sued Me and Got a Judgment Against Me. Is It Too Late to File Bankruptcy?
Can Court Judgments be Removed in Bankruptcy?
Usually, no. It's still a good time to file bankruptcy.
High among the many destructive and pervasive myths about bankruptcy that I hear from clients who call me for bankruptcy advice is the myth that once a credit card or other bill collector sues and obtains a court judgment on a debt, it's too late to file bankruptcy. This is not true!
Unless the judgment includes a cause of action for fraud against you—which is extremely uncommon in lawsuits for credit card debt—this judgment against can be discharged in bankruptcy just the same as debts that haven't resulted in a lawsuit.
I am not trying to suggest that you should delay filing for bankruptcy when you are sued by your creditors.
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. Confusing, right?
Here's an example: if you have a judgment lien against your home in the amount of $10,000, and you have $75,000 of equity protected by the California homestead exemption, then that judicial lien can be removed in your Chapter 7 bankruptcy - because the lien impairs your protected equity.
On the other hand, 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 on the property until it's paid or you sell the property. As bizarre as this is, even though the creditor can't collect the discharged debt by wage garnishment or levy against your bank account, the lien will continue to encumber the property it was originally recorded against.
You then can't sell the property 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.
Can Bankruptcy Stop a Wage Garnishment?
While some wage garnishments may be unaffected by bankruptcy if the debt is not dischargeable, such as 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, we can often get BACK your wages which have been garnished for consumer debts within 90 days prior to the bankruptcy filing.
Confused? I don't blame you. Why don't you call me today for a free consultation and I'll explain it in more detail on the phone when we chat.
Photo by CreditScoreGeek.com