Bankruptcy and Judgments or Judgment Liens
There are many types of debt and many stages of relationships that exist between debtors and creditors. When a creditor in North Carolina obtains a judgment or judgment lien against a debtor, that lien will attach to certain property owned by the debtor.
Filing Before Judgment
Ideally, you file bankruptcy before a debt goes to judgment. If you’ve received notice of a lawsuit which has not yet resulted in a judgment, it’s not too late. By filing the bankruptcy prior to judgment, if the debt is dischargeable, it is included in the bankruptcy petition and will no longer present a problem.
Filing After Judgment
There’s good news. Even if a judgment is already recorded, the filing of the bankruptcy will discharge the debt associated with the judgment, ending personal liability for the debt. What remains in this situation is a judgment which can still attach to property. For example, in this situation, if you own a home prior to filing bankruptcy, the filing will eliminate your personal liability on the debt. But, when you go to sell your home (if you do so before the typical 10 year expiration on the judgment), you’ll have to pay the judgment from the proceeds.
If you purchase property after the bankruptcy, even though the judgment still exists of record, the bankruptcy will prevent the judgment from “attaching” to that property—i.e. it will not cause a problem for you.
A Solution: Avoiding Judgment Liens
While judgments represent potential problems for clients who file, one solution is to have your bankruptcy attorney file a motion under bankruptcy code section 522(f)(1)(a) to avoid the judgment. Depending upon the circumstances, the lien may be entirely avoided or partially avoided. This means that the filing of the bankruptcy disposes of the personal liability, and the motion mentioned above disposes of any additional liability.
A Formula For Determining Avoidability
1. Add all existing liens, including judgment
2. Add applicable exemptions ($35,000 for homestead, for example)
3. Compare to FMV of property (home)
4. The judgment can be avoided to the extent that (Liens + Exemptions) > FMV
- For Example: Assume a home is worth 100k. There is a mortgage for 60k and a judgment for 20k. The applicable bankruptcy exemption for homes in North Carolina bankruptcy is 35k.
- (60k + 20k + 35k) = 105k.
- The home is only worth 100k, which is 5k less than the total items above. In this case, the 20k judgment can be partially avoided and will go from 20k to 15k.
- IF the 105k total above had been 120k, the entire judgment of 20k could be avoided.
It’s your bankruptcy attorney’s job to understand the rules of bankruptcy and take advantage of all possibilities to discharge debt for you. Reach out and make a phone call today to find out your options. Call 704.749.7747 for a free phone consultation today.