When you don’t pay a debt, the collector is likely to file a lawsuit against you. In 2017, one large debt buyer filed 5,268 debt collection lawsuits in Los Angeles County alone. Multiply that by the number of counties in California, then multiply that by the number of debt buyers and collectors and you’ll realize that collection lawsuits mean big business for these companies.

According to various studies, between 60 and 95 percent of all debt collection lawsuits end with default judgments in favor of the plaintiffs because most people either don’t answer the case against them at all or do not appear to defend themselves in court.

How a Default Judgment Impacts Your Life

Before a lawsuit, the only way the collector can get money from you is by convincing you to make a payment. Phone calls and letters pour in, each one demanding payment and threatening a variety of dire consequences. Ultimately, the decision is a voluntary one; either you pay the debt, or you don’t pay the debt.

That all changes when the creditor obtains a default judgment. The judgment is an order from the court requiring you to pay not only the debt but also continuing interest at the legal maximum. In many cases, the judgment also holds you responsible for payment of the creditor’s legal fees and costs. Once the collector obtains a default judgment, A default judgment is a common reason to consider filing for bankruptcy. In New York a judgment creditor has the right to freeze your bank account, take part of your wages, and continue to add interest on the amount due at a statutory rate until the debt is paid in full.

If you’re living paycheck-to-paycheck as is, the prospect of having to surrender a portion of your income isn’t appealing.  And given the high cost of living in places like Los Angeles and New York, every dollar counts.

It’s true that filing for bankruptcy will stop the income execution (wage garnishee), lift the hold on your bank accounts, and give you some breathing room.  But even the bankruptcy discharge won’t eliminate the impact of that default judgment against you.

A judgment is a matter of public record, and creates a statutory lien on any real estate you own as of the date on which the judgment is filed.  Your bankruptcy may eliminate your personal liability for payment, but if you own any real estate then that judgment will still need to be paid in full (plus interest) when you sell the property.

The only way around that lien is to file a motion with the court during your bankruptcy case.  Whether the facts and circumstances of your situation warrant such an action (or whether the motion would be approved) is up to you and your lawyer.

Even for those who don’t own any real estate at the time the default judgment is entered, filing for bankruptcy will not wipe out the civil court judgment itself.  The judgment will remain as a hollow shell, on file with the civil court (and on your credit report) until some action is taken.

Under New York law (not bankruptcy law) you can file a motion with the civil court to mark the default judgment as discharged, but only after a year has passed since your bankruptcy has been discharged.  Your bankruptcy lawyer may be able to handle this for you, but most lawyers don’t consider that as part of the process of filing for bankruptcy.

Filing for Chapter 7 bankruptcy won’t get rid of a judgment that’s already on your record. Depending on your situation, you may not care.

When you file for Chapter 7 bankruptcy, you are looking to wipe out your personal liability for repayment of certain debts.

If a creditor sued you and got a judgment before the bankruptcy case is filed, then you may be able to wipe out that liability.

But the judgment is a separate matter. It is a record of an official result of a lawsuit in court. Even if you wipe out your liability for the debt, the record of your judgment remains in place.

What If You Do Nothing?

Assuming the underlying debt is wiped out in your Chapter 7 bankruptcy case, the judgment remains nothing more than an empty shell.

The creditor cannot freeze your bank account, seize your wages, or take any further action against you.

However, the judgment may remain on record as a valid lien against any property you owned at the time your Chapter 7 bankruptcy was filed. The creditor can’t do anything with the lien, but it will need to be paid off in the event that you try to sell the property while the judgment is in place.

Under California law, a judgment becomes a lien on land, a house or other building you own only if the judgment creditor files an Abstract of Judgment. In other states such as New York, however, the judgment is automatically a lien against property.

Why A Judgment Lien May Not Be Troubling

A judgment does not last forever. In the event that the judgment is considered a lien against your property, you may not be concerned if you don’t intend to sell the property before the judgment expires.

Judgments expire in 10 years under both California and New York laws. In both states, however, the creditor can apply for an extension of the judgment to get 10 more years to collect the debt.

In addition, if you’re in New York you have the option of going back to state court to seek a discharge of the judgment after a certain amount of time has passed since your bankruptcy discharge. Learn more about that here.

If you go through Chapter 7 bankruptcy and have a judgment but don’t expect to need to sell your property within the time that’s left for enforcement, you may decide to do nothing. It’s a decision you need to make with your bankruptcy lawyer.

How To Get Rid Of The Judgment Lien In Bankruptcy

Let’s say you don’t feel comfortable with the lien remaining in place.

If that’s the case, you’ll need to file a motion to avoid the judgment lien in bankruptcy court.

To do so, you’ll need to prove that the lien is impairing an exemption to which you are entitled under the bankruptcy laws. You should expect to provide to your lawyer at least all of the following:

  • valuation of the property;
  • balance due on all mortgages, home equity loans, and other liens; and
  • copy of the judgment (and, if applicable, Abstract of Judgment) from the state court.

Is It Included In Your Chapter 7 Bankruptcy Fees?

Depending on when the judgment is issued, taking care of the motion in bankruptcy court may or may not be made a part of your retainer agreement. You want to make sure your lawyer knows about all pending lawsuits and outstanding judgments so that he or she can properly assess your situation.

Read the retainer agreement carefully and ask questions. Without full information about what’s covered and what isn’t, there’s no way for you to plan your post-bankruptcy future.