Filing a Chapter 7 case stops foreclosure of your home temporarily, helping you gather funds for your transition to your next housing.
Recently we went through a list of ways Chapter 7 buys you time when dealing with debts affecting your home. Included was that filing a Chapter 7 case can “stop a lawsuit from turning into a judgment lien.” That judgment lien could turn a debt that you wouldn’t have to pay after bankruptcy into one you would. That’s certainly a result you want to avoid.
Some judgment liens against your home can be “avoided”—or undone– in bankruptcy. Then maybe you wouldn’t have to pay the underlying debt. But some judgment liens can’t be “avoided.” The debt behind such a lien would therefore have to be paid, even after filing bankruptcy. Again, that’s a result you really want to avoid.
In those situations filing a Chapter 7 case before there’s a judgment usually prevents that bad result. Let’s dig into this more to better understand it.
Lawsuits by Conventional Creditors
If you’re thinking about bankruptcy the judgments you mostly likely need to be worrying about are those by creditors. By “creditors” we mean conventional ones like those you might owe for credit cards, medical bills, a repossessed vehicle, personal loans, and such.
Lawsuits by such creditors often don’t leave you with much defense. You concede owing the money you’ve contracted to pay, haven’t paid, so usually (but not always) you have no defense. The creditor will get a judgment by default against you if you don’t respond to the lawsuit in time.
Less Conventional Creditors
But you might also be involved in other kinds of legal disputes potentially resulting in a judgment against you. That could arise from just about anything. A few examples would be:
- a vehicle accident with a dispute about fault, damages, or insurance coverage
- an injury to someone on your property that for some reason isn’t covered by your homeowner’s or renter’s insurance
- a disagreement with a contractor or other service provider on repairs to your home
- a dispute with family members about the proceeds of a deceased relative’s estate
- a disagreement with your business’ investor, co-founder, employee, supplier, or its commercial landlord
It’s not unusual for people involved in such disputes to file bankruptcy if such litigation is not going well. They have much financially riding on wining the lawsuit. Then when it becomes clear that’s not happening they desparately need to cut their losses.
Filing Bankruptcy Prevents a Judgment against You
Whether with conventional creditor lawsuits or these other kinds of disputes, the timing of your bankruptcy filing is crucial. It has to be filed in time to prevent the lawsuit from turning into a judgment, and then into a judgment lien against your home.
So when dealing with a conventional creditor lawsuit, your bankruptcy lawyer generally needs to file your Chapter 7 case in bankruptcy court before your deadline to file the formal answer to the creditor’s complaint in the state court. (There are also likely other more expensive ways to prevent a default judgment from being entered against you.)
When dealing with ongoing litigation, talk with your lawyer about when you’d have to file bankruptcy to prevent entry of a judgment.
Judgments and Judgment Liens
State laws differ about what it takes for a creditor who gets a judgment against you to turn that into a judgment lien against your home. This may take an extra procedure. Or it may happen simultaneously with the court’s entry of the judgment. Again, talk with your lawyer. But in most situations, the judgment lien can happen very fast after the judgment, if not at the same time. So, for practical purposes, you’re going to want to file bankruptcy before the entry of the judgment.
Next: Avoidable vs. Unavoidable Judgment Liens
If you already have a judgment lien against your home, don’t despair. As we said in the first couple paragraphs, bankruptcy allows you to “avoid” some judgment liens against your home. In our next blog post we’ll distinguish between judgments that can and can’t be “avoided”—or undone—in bankruptcy.