How to Handle Judgments In Bankruptcy
While filing bankruptcy stops a judgment from being enforced, judgments can transform unsecured debts into secured debts in bankruptcy giving them priority.
Below are a few tips on how debtors should handle judgments when filing bankruptcy:
- Tackling judgments in bankruptcy is an area where prevention really is better than a "cure." If a debtor is facing a lawsuit by a credit card company or other lender, they should immediately file bankruptcy if that is in their best financial interest - don't delay. Once the debtor files bankruptcy, it will stop the lawsuit from continuing and prevent the entry of any judgment against the debtor.
- If a judgment has already been won against the debtor, filing bankruptcy will prevent the judgment from being enforced. However, judgments may be treated as liens in bankruptcy, effectively turning unsecured debts into secured debts. For example, if a credit card company won a judgment against the debtor for $20,000 before bankruptcy, the judgment would become a lien against the debtor's assets and have priority over other unsecured debts.
- Once the debtor has filed bankruptcy, they need to consult with their bankruptcy attorney about "stripping the judgment" making it unenforceable or void. By stripping the judgment in bankruptcy, the debtor prevents the debt associated with the judgment from becoming secured. This action is especially important in Chapter 13 bankruptcy where unsecured creditors receive less money in the repayment plan than secured creditors. Stripping a judgment in Chapter 13 bankruptcy can effectively reduce the amount of money a debtor must repay in the three to five years they remain in their plan.