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
- 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. 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.