Law Office of Robert L. Firth
Don’t Let a Creditor Get a Judgment Preventing Its Debt from Being Written Off in Bankruptcy
Some creditor judgments are very dangerous since the prevent you from writing off the debt later in bankruptcy. Try to avoid judgments.
Consequences of Allowing a Judgment
In recent blog posts we’ve written about the most direct reason to avoid letting a creditor which has sued you get a judgment against you–it gives the creditor powerful ways to make you pay the debt, such as by garnishing your paychecks or bank accounts. Also, if you own any real estate, including your home, a judgment usually creates a lien on your real estate, another way to force you to pay the debt.
But there’s another reason we mentioned earlier–you should avoid a judgment whenever possible because it can result in that debt not being written off (“discharged”) when you file bankruptcy. Or even if that debt can be discharged, it may become much more difficult to do so. This blog post is about these kinds of judgments.
How a Judgment Can Affect Whether a Debt Can Later Be Discharged
So how can a judgment turn a debt that could have been discharged into one that can’t, or is much harder to discharge?
A very basic principle of law states that once one court has decided an issue, other courts must respect that decision. The idea is that litigants should be able to use court resources only once to resolve a specific dispute. Once a court decides an issue, the losing party shouldn’t be able to hunt around for another court to hear and decide the same dispute (except for appeals to a higher court).
The original court—usually a state court—could potentially resolve a lawsuit in a way that would later makes the debt not dischargeable under bankruptcy law. A creditor could allege that the person owing the debt incurred it in some fraudulent or inappropriate way. If the lawsuit is resolved with the judgment reflecting that that’s what happened, then later when the debtor files bankruptcy the bankruptcy court would likely be bound by that decision by the original court. The judgment having been previously entered by the original court, the debtor would not have an opportunity to challenge its conclusions after filing bankruptcy.
Many Judgments Do NOT Cause Discharge Problems
Most creditor lawsuits are about only one thing: whether the debt is legally owed. So the judgments arising from such lawsuits usually establish nothing more than that the debt is a valid debt, at a certain amount, plus certain fees and interest. Such judgments, which don’t make any determination about a debtor’s fraudulent or otherwise inappropriate behavior, do not impact the discharge of the underlying debt in a subsequent bankruptcy.
It’s Safer to File Bankruptcy Before a Judgment Is Entered
The problem is that it’s not always clear what exactly the initial lawsuit decided in its judgment, and thus whether the judgment makes the debt not dischargeable or at least harder to discharge. Specifically, the language of the judgment may not mesh exactly with the bankruptcy laws about fraudulent debts, which makes difficult to determine whether that issue is still open for determination by the bankruptcy court.
A related question is whether the matter was “actually litigated” if the person against whom the judgment was entered did not appear to defend the lawsuit or did not have an attorney. In other words you may or may not be able to get your day in bankruptcy court depending on whether in the eyes of the law you really already had your day in the prior court.
To avoid these kinds of ambiguities, and to avoid the risk of losing your chance to defend your case in bankruptcy court, don’t wait until after a judgment has been entered against you to see a bankruptcy attorney. This is especially critical if a lawsuit’s allegations against you refer to any inappropriate behavior other than not repaying the debt.
The bottom line is that if you get sued by any creditor you should quickly see an attorney, even if you don’t plan on fighting the lawsuit. Getting to an attorney quickly enables you to learn if the lawsuit could lead to a judgment making the debt not dischargeable, or more difficult to discharge, in bankruptcy. If so, you would then have the option of filing the bankruptcy to prevent such a harmful judgment from being entered, instead of being stuck with it if you file a bankruptcy later.