Nothing gets someone into a bankruptcy lawyer’s office quicker than the prospect of losing a lawsuit and having a judgment entered against them.
Callers are frantic to see if they can file bankruptcy before judgment is entered.
They worry that once a judgment is entered, their options in bankruptcy vanish.
Not so.
The debt underlying a California judgment remains just as dischargeable as it was before the case was filed.
And, a judgment in California does not automatically become a lien on the defendant’s property.
It takes another step in California for a money judgment to become a lien. And as long as there is no lien, the debt is unsecured and potentially dischargeable in bankruptcy.
Discharge turns on kind of debt
Contrary to what some dishonest debt collectors will tell you, judgments are just as dischargeable in bankruptcy as the underlying debt is.
Whether an unsecured debt can be discharged in bankruptcy looks at the nature of the debt, not whether a court has ruled on the merits of the claim.
So,
- Child support is non dischargeable, whether or not there is a judgment.
- Debts incurred by fraud are non dischargeable in bankruptcy, if the creditor can prove fraud to bankruptcy standards.
- Credit card debts honestly incurred are dischargeable, judgment or no.
Liens change everything
What does change the dynamic is an abstract of judgment or a notice of judgment lien.
These documents do create a lien on the judgment debtor’s assets.
Recording an abstract of judgment creates a lien on real property in the county in which it is filed. A notice of judgment filed with the California Secretary of State creates a judgment lien on personal property located in the state.
If the lien cannot be avoided in bankruptcy, the judgment creditor has obtained an advantage.
What my friend Jay Fleischman’s post about civil judgments in New York and their bankruptcy implications points out is the way state law impacts the operation of federal bankruptcy law.
The rights that each party in a bankruptcy case brings to the bankruptcy case originate in state law.
It also demonstrates why lawyers are licensed in each state and why my California law license does not entitle me to practice bankruptcy law in New York.
And why bankruptcy is not a do-it-yourself project.
More
When you’re served with a lawsuit
Everything you need to know about judgments
Wage garnishment survival guide
Who are the really scary creditors
Image in the public domain, courtesy of Wikimedia.
