How are judgment liens affected by bankruptcy?
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Property owners with a judgment against them or heavy debt to creditors often filing bankruptcy protection, or in some cases, are subject to an involuntary filing. Bankruptcy can help offer relief from obligations acquired in the years leading up to the bankruptcy filing, through what is known as a debt discharge. This process is governed by the Bankruptcy Code and what debts and personal liabilities can be discharged depend on the chapter filed, the state in which it is filed and the specific situation.
Under the Bankruptcy Code, in most cases, pre-bankruptcy judgments can be discharged in a filing. As soon as the bankruptcy is underway, all current or pending lawsuits are immediatley halted by the automatic stay. Read about automatic stays here. Even if a judgment is filed right before a debtor is going into bankruptcy, the judgment will not have to be paid right away and there will likely be time to get the filing going before having to pay; and once the bankruptcy is being filed, judgments are voided.
If a judgment lien for wages or a home are placed while a bankruptcy is in the filing process, a request can still be filed to discharge the lien. Although it generally does not happen, creditors can object to this request; but a bankruptcy judge will usually grant the motion to remove the lien. The most common exception to this rule is when a bankruptcy debtor has a significant amount of equity in their home, they may not be able to avoid the lien as the trustee may decide to pay the judgment using this equity.
In addition, if a debtor is worried that a judgment may be placed after the bankruptcy is filed and they may be forced to pay, they can take solace in the fact that a judgment only becomes a lien when it is secured to real estate; and a judgment cannot be placed on this type of property after the bankruptcy is filed.
Judgment liens that exist before filing bankruptcy generally survive the discharge issued by the bankruptcy court. If the lien only attached recently, you may be able to have it set aside, but the general rule is that bankruptcy extinguishes debts but not liens. If a judgment creditor takes a judgment lien against your property, you should contact a bankruptcy attorney as soon as possible because you can generally only have the lien set aside if it attached within 90 days before you filed your bankruptcy case. If the creditor has a general judgment lien on file with a court or register of deeds, that lien will not attach to property that you acquire after your bankruptcy as long as the underlying debt was discharged in the bankruptcy. This is so even if the lien did attach to other property that you had before you filed.