In the United States, court judgments are one of the biggest catalysts for personal bankruptcy filings. If a creditor or another party serves you with a lawsuit, you’ll have a set amount of time in which to plan your response before the court in which the suit was filed issues a “default judgment” against you.
For your purposes, this is tantamount to an admission of liability. Once you’ve been hit with a default judgment, the plaintiff in your case has the right to recover the amount of the judgment by garnishing your wages, bank accounts, and tax refunds.
Avoiding a Judgment by Filing for Bankruptcy
In most states, it’s easy to avoid full liability on default judgments by filing for bankruptcy. Depending upon your total net worth, filing for bankruptcy may substantially reduce or eliminate these and other outstanding obligations. Of course, there’s a catch: A bankruptcy filing can damage your credit score for up to a decade and may even damage your ability to find a career-oriented job.
Once you file for bankruptcy, your creditors are required by law to cease their attempts to collect on your debts. There are just a few types of common debt, like student loans, that are exempt from this requirement. The only judgments that can’t be stopped by a bankruptcy filing are those issued by state and federal authorities. These may include DUI penalties and other felony-related fines, court-ordered child support and alimony, and back taxes.
Lawsuits Filed During the Bankruptcy Process
Whereas you may still be liable for part of a judgment issued prior to your bankruptcy filing, you are legally protected from any liability for judgments issued after you enter bankruptcy. If you suspect that one of your creditors is about to file a lawsuit against you, it may behoove you to preempt this action by contacting a bankruptcy lawyer.
Differentiating Between Chapter 7 and Chapter 13
There are two types of personal bankruptcy. When you file for Chapter 7 bankruptcy, a court-appointed trustee will seize your non-exempt assets and divide them among your creditors according to their seniority. Although creditors who secured judgments against you may receive some of these assets, you’ll no longer be held legally responsible for answering them.
If you choose to file for Chapter 13 bankruptcy, you’ll submit to a court-ordered repayment plan and may be responsible for making partial payments to these same parties.