Judgments, Judgment-Proof, and Bankruptcy
In essence, money judgments are final orders entered by courts that a defendant in a lawsuit owes a certain sum to the plaintiff. They represent a particular stage of the life of a debt, and might arise from all manner of debts. Consumers are most often faced with judgments when a credit card lender or utility company successfully sues to collect an amount owed, an auto lender obtains a judgment following repossession of car worth less than the money owed, or a mortgage lender obtains a judgment following a foreclosure that fails to pay off the loan. The latter two are known as "deficiency judgments" and on the occasions that they are obtained, often surprise the debtor who thought losing their house or car was the end of that debt.
With a judgment, a creditor can attempt to use official processes to levy on the debtor's property and has a lien on real estate within the county of the judgment or other counties where it has been transcribed into that county's records. This collection on this judgment is available for 10 years, including the judgment lien. A creditor may even bring an action to obtain a fresh judgment on the first judgment, in effect extending out the 10 years. With this extended time window, a determined creditor may come after your property years later once you have had a financial turnaround.
Many individuals do not own property worth more than the allowances provided by the state exemption statutes. Commonly, such persons are referred to as "judgment proof," as their assets provide no means for a judgment creditor to be paid. If one is judgment proof, the mere existence of a judgment does not cause much present-day concern. However, only a person who expects to remain judgment proof for at least 10 years can truly be unconcerned about a judgment.
Bankruptcy can be very helpful in dealing with judgments. One of the core functions of bankruptcy is to bring all creditors into the same proceeding, and use the window of time in bankruptcy as snapshot for what each gets, leaving the debtor with a fresh-start. Section 524(a)(1) voids judgments which represent determinations of liability that discharged with the bankruptcy discharge. While there can be some complex situations where the judgment debt would survive the bankruptcy discharge, ordinary cases such as a credit card judgment or a deficiency judgment would generally be voided by the discharge. Then, after the bankruptcy, the judgment is no longer hanging over the debtor, who can work to start anew without worry that the old judgment is going to take away new success.
If one has real property, and a judgment lien exists, that lien doesn't disappear with the voided judgment. However, many debtors have opportunities to rid themselves of the judgment lien as well. Part two of this post continues discussion of judgment lien avoidance.