You have been sued for a debt, the case is over and a judgment has been entered against you. Is it too late to file for Bankruptcy to try to discharge most or all of the debt? No…it is rarely “too late” to file a Bankruptcy case. Often, it is the judgment that provides the only reason to file the case and it would not have been necessary had the person been successful at trial. It is worth the financial risk to go to trial and see how it turns out. In other situations, the person does not have the money to hire a lawyer to defend the lawsuit so even a “win” would put them in debt. Either way, a particular debt is typically just as dischargeable in a Chapter 7 or Chapter 13 Bankruptcy case, whether the case is filed before or after the judgment is entered. However, there are a few exceptions and some important details to consider in many cases.
The fact that a judgment debt may be discharged not mean that timing is not important. For example, in Georgia, a money judgment becomes a judgment lien on the debtor’s personal and real property. If the person waits long enough, the judgment lien will attach to any equity in their house and will remain there even in a Bankruptcy case. Essentially, it will be no different than a second mortgage or line of credit that will eventually have to be paid off before the property is sold or the person gets clear title, even if personal liability is discharged in Bankruptcy. The same may happen with any valuable personal property the person may own and, of course, wages and bank accounts may be garnished. If you are facing a judgment, or one has been entered, it is important to at least speak with a Bankruptcy lawyer to discuss the options and timing.
The specific claims made in the lawsuit may also be important. Some types of debts are not dischargeable in a Bankruptcy case. If you are being sued for past due child support, a Bankruptcy case might not help you at all as far as that debt. However, if you are being sued for breach of contract and fraud, it does make a difference whether the final judgment finds you liable for fraud. Debts arising from fraud are generally not dischargeable, so it is important to avoid a fraud judgment if possible. Bankruptcy Courts will typically honor that state court judgment and except the debt from your discharge (if the creditor files the appropriate action). However, if you are only found liable for breach of contract, or the Bankruptcy case is filed before any judgment is entered, the creditor will have to go to Bankruptcy court and initiate a new lawsuit from the beginning to prove their fraud claims. At this point, many will not spend the additional time and money. This is another example of the importance of seeing a Bankruptcy lawyer before a judgment is entered to at least discuss the options that may exist for you.
A lawsuit filed against you is an important event, as is the filing of a Bankruptcy case. The key for both is to not ignore the situation — it will not just go away. Speak with good lawyers about the lawsuit, and speak with one or two local Bankruptcy lawyers if the lawsuit and debts (or expenses to defend the lawsuit) are too big for you to comfortably handle.