What is a judgment? Can bankruptcy help?

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Chapter 7 Bankruptcy Consumer Debt Personal Finance Questions

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Posted by: John O'Connor

Judgement
Yep, You owe $1,000. Judgment granted.

A judgment is a legal determination that you owe a debt

A judgment is really just a piece of paper signed by a judge that says you owe a debt. For example, in the event you can’t pay a credit card on time, the bank has no immediate recourse. They can call and write, but they cannot immediately attach your personal assets in satisfaction of what you owe. However, once a judgment has been obtained, the game changes. A creditor then has the green light to use the legal system to try to attach your personal property or garnish your wages (if your state’s laws permit garnishment) in satisfaction of the debt.

How do creditors obtain a judgment?

In order to obtain a judgment, a creditor will usually be required to file a lawsuit seeking payment of past due debts. In the credit card scenario, most borrowers fail to respond to the lawsuit, which allows the bank to win by default. If the borrower never files an answer to the creditor’s complaint, the court will assume the debt is valid and automatically enter judgment for the creditor. Although the process can seem complicated, judgments don’t come falling out of the sky. You must receive notice of a creditor lawsuit in order for a judgment to be entered against you. When a creditor files suit, they must notify you by delivering a summons and a copy of the complaint to your home.  The summons will tell you how long you have to respond before a default judgment will be entered against you. If you receive court documents in the mail that you do not understand, it is always best to pick up the phone and call an attorney to make sure that your rights are protected. Creditors are  typically more difficult to negotiate with once they have obtained a judgment because their ability to collect is strengthened.

A judgment puts the public on notice that you owe money

A judgment is a matter of public record, often recorded in the county records where you live. One of the truly unfortunate aspects of the recordation of a judgment, is the fact that it will appear on your credit under the “public records” section of the report. Judgments and bankruptcies will both appear under this section of your credit report and both can do significant damage to your FICO score. In addition to telling the story of your financial history, the judgment tells the world that you owe a debt and that your creditors can look to your personal assets in satisfaction. Notice I say “look to your personal assets.” Unless you have property that is considered nonexempt under your state’s exemption laws, even the creditor armed with a judgment will not be able to take anything from you. Debtors who have no property that is vulnerable to creditors are known as judgment proof.

How long do judgments last?

Although this is a function of state law, most recorded judgments last for a period of 10 years, and creditors are often given the opportunity to seek renewal of the judgment prior to its expiration. This means that although you may be broke today, if you win the lottery tomorrow, your creditor can still enforce its judgment against your winnings.

Does bankruptcy eliminate a judgment?

Filing for bankruptcy will discharge your personal liability for debts, including debts that are owed to judgment creditors. However, if a judgment creditor has placed a lien on your property, filing for bankruptcy will not, in and of itself, remove the lien. While the lien cannot attach to property that you acquire after bankruptcy, it can remain as an encumbrance on property that you owned prior to filing for bankruptcy, such as real estate. In some cases, your bankruptcy lawyer may be able to petition the court to have liens that impair an exemption avoided, but judgments are sticky. The best strategy is to take action before they attach.

The bottom line

Creditors use judgments to step up their efforts in collecting a debt. Prior to a judgment being entered against you, you will likely receive collection letters, phone calls and eventually a summons in a lawsuit. It is important to take action when you receive  documents in the mail that you do not understand, working with an attorney sooner rather than later, can help you protect your credit as well as your assets.

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