What Happens to a Small Claims Court Judgment If I File for Bankruptcy?

If a creditor won a lawsuit against you in small claims court, the court probably issued a judgment giving the creditor additional rights to help collect the money that you owe. For instance, the creditor can use the judgment to garnish your wages or file the judgment in the county land records where, like your mortgage, it will act as a lien until you sell or refinance the property. In this article, you'll learn about judgment liens in bankruptcy.

Nondischargeable Debt

Although many debts are dischargeable (forgiven) in a bankruptcy case, some aren't. You'll still owe nondischargeable debt after the bankruptcy ends.

If your judgment is for a nondischargeable debt, bankruptcy won't provide you with relief. Both the debt and lien will survive the bankruptcy, and you will continue to owe the debt until it's paid or becomes uncollectible under state law.

Examples of nondischargeable debt include:

• recent income taxes
• domestic support obligations, such as child support
• student loans (except in extreme circumstances), and
• debt arising from death or bodily injury caused by your intoxication.

Some debts get discharged, however, unless the creditor asks the court to make it nondischargeable (and the court agrees to do so). Examples include:

• You caused injury by committing a willful or malicious act, like an assault.
• You committed fraud to obtain money, goods or services, like lying on a credit application.
• You took advantage of a position of trust, such as by embezzling money from an employer.

Dischargeable Debt and Judgment Liens

If you have a judgment lien associated with a dischargeable debt and you file for bankruptcy, you're in luck—the debt will get wiped out. The creditor won't be able to take action to collect directly from you.

However, it's important to understand that the debt and the lien created by a judgment are two separate things. While you can eliminate the dischargeable debt, you'll need to take additional action to remove the lien. Bankruptcy won't automatically cause the lien attached to your property to disappear.

Why is this a problem? As long as t lien remains in place, the creditor will have an interest in the property it attaches to. The creditor can force a property sale or wait until you sell it and get reimbursed from the proceeds.

If you don't take action, the judgment will continue to impair your property until it's paid in full or the judgment expires. The active period for a judgment varies by state. A good average is ten years, often with an option to extend the judgment for an additional ten years.

Avoiding a Judgment Lien

Fortunately, you'll be able to get rid of the lien in some instances, but you'll have to take action. You can do this in two ways.

Asking for a Release

The creditor might agree to release the judgment if it's clear that the court will likely avoid the judgment or try to negotiate a settlement by asking for a lesser amount in exchange for the release.

Filing an Avoidance Motion

You or your lawyer can file a motion in the bankruptcy court asking the judge to avoid the judgment lien. You'll stand a good chance of getting a favorable court ruling as long as the lien meets these conditions:

• The lien originated from a money judgment issued by a court.
• You didn't agree to the lien as part of a settlement agreement.
• You have equity in the property the judgment lien is attached to (like real estate).
• You can claim an equity exemption (you're entitled to protect it from creditors), at least partially.
• You would lose some part of your exempt equity if the property were sold to pay the judgment.

If the judgment is for an amount more than your exemption, the court can issue a partial lien avoidance up to the exempt amount. You will still have to pay something to the creditor to satisfy the lien, but it will be less than the judgment amount.