How Does Bankruptcy Affect Court Judgments?
There is a common misconception that the easiest way to avoid paying a court judgment is to declare bankruptcy. Yet bankruptcy does not automatically eliminate all debts. It does not always eliminate judgments. To make matters worse, bankruptcy tarnishes a person’s credit for years.
Specifically where judgments are concerned, it is not a matter of whether bankruptcy cancels them. It is a matter of the type of debt attached to a judgment. Some types of debts can be eliminated by bankruptcy while other types cannot. If you are facing a debt not covered by bankruptcy, filing will not change any judgment attached to that particular debt.
Different Types of Judgments
A judgment is essentially a court order that recognizes the validity of a given debt and legally requires the debtor to pay it. With such a broad definition, you can probably imagine that there are different types of judgments. The most common form of judgment results from a failure to pay one’s bills. But judgments can also be the result of:
- accidents (workplace, car, slip and fall, etc.)
- medical malpractice or injury
- business disputes apart from billing
- failure to pay child support or maintenance
- failure to pay once taxes.
Some types of debts are automatically eliminated by bankruptcy. Others are not. So again, declaring bankruptcy is not necessarily a way to avoid paying a judgment.
Different Types of Bankruptcies
United States bankruptcy law is divided into multiple chapters designed to cover different scenarios. Most consumers who file bankruptcy do so under Chapter 7 or 13. Chapter 7 bankruptcy calls for liquidation of the debtor’s assets in order to pay debts. Chapter 13 bankruptcy allows the debtor to reorganize finances and assets in order to work out repayment terms.
Under both types of bankruptcy, typically discharged debts include:
- credit card balances
- unpaid bills (rent, utilities, etc.)
- personal loans.
Additionally, there are certain types of debts that bankruptcy does not discharge. These include:
- auto loans
- maintenance and child support
- local, state, and federal taxes.
There are both federal and state laws in play when debtors filing for bankruptcy are also subject to court judgments. It is ultimately up to a bankruptcy court to determine which debts are dischargeable and which ones are not. Courts are bound by the law in this regard. Debts are not open to interpretation.
When Bankruptcy Does Not Help
Perhaps the most important thing to know is that Chapter 7 bankruptcy cannot discharge most types of debts that are secured with liens. The top two are mortgages and car loans. As such, a creditor could place a lien on a debtor’s house for failure to pay a judgment. Even if that debtor declares bankruptcy, the lien will remain intact.
Judgment Collectors, a Salt Lake City collection firm that specializes in judgments, explains that any judgments directly related to mortgages and auto loans are also unaffected by bankruptcy. If you fail to pay your mortgage or car loan, a judgment can result in seizure and sale. Bankruptcy will not change that.
Better Just to Pay
Unfortunately, too many people assume that bankruptcy is the silver bullet that puts judgments to rest once and for all. This is not the case. There are some types of debts that cannot be discharged through bankruptcy. And even when debts are dischargeable, bankruptcy can do more damage to a person’s finances than the judgment itself.
The best course of action in most cases is just pay what you owe. You are better off paying even if that means entering a payment plan that will take years to complete.