When the Debtor Files for Bankruptcy: What Happens to Your Judgment

You have a judgment. Collection is underway. Then a notice arrives: the debtor has filed for bankruptcy.

For many judgment holders, that notice feels like the end of the road. Sometimes it is. Often it is not. What happens next depends on who filed, what type of bankruptcy it is, and what kind of debt the judgment represents.

The automatic stay

The moment a bankruptcy petition is filed, a federal rule called the automatic stay takes effect. It stops nearly all collection activity against the debtor. That includes bank account restraints, wage garnishments, property liens being pursued, and new subpoenas aimed at collection.

The stay applies whether or not you have been notified. Collection steps taken after the filing, even by mistake, can create problems for the creditor. If you learn of a bankruptcy, stop enforcement activity and confirm the filing before doing anything else.

Individuals and businesses are treated differently

Bankruptcy is not one process. The type of filing matters.

• Chapter 7 is a liquidation. For an individual, unsecured debts are generally discharged, meaning the debtor is released from them. A business that files Chapter 7 does not receive a discharge, but the business is typically shut down and its assets sold.

• Chapter 13 is a repayment plan for individuals. The debtor pays creditors over three to five years from income. Judgment holders can file a claim and receive payments through the plan.

• Chapter 11 is a reorganization, most often used by businesses. Creditors vote on a plan and are paid according to its terms.

File a proof of claim

If the debtor's case includes a payment to creditors, you generally have to file a proof of claim to be paid. Deadlines apply, and a creditor who misses the deadline can be left out. Notices from the court will list the case number and the dates that matter. Read them as soon as they arrive.

Some debts survive a discharge

A Chapter 7 discharge does not erase every debt. Certain debts can be found nondischargeable, including debts based on fraud, embezzlement, or willful and malicious injury to another person or their property.

This is not automatic. In most of these situations the creditor must file a complaint with the bankruptcy court, and that complaint must be filed within 60 days after the first date set for the meeting of creditors. The deadline is strict and is rarely extended. A creditor who waits loses the argument.

If your judgment arose from conduct like fraud or intentional harm, this is the single most important date in the case.

Liens and recent collection activity

Two other points affect judgment holders.

Recent collections can be reversed. Payments or liens obtained from the debtor in the 90 days before the filing can be challenged and recovered by the bankruptcy trustee, so the money may need to be returned.

Judgment liens on exempt property. A judgment lien on property the debtor is allowed to protect, such as a home, can sometimes be removed in bankruptcy. Liens on property with real equity above those protections are more likely to hold.

What it means for your file

A bankruptcy filing changes the timeline. It does not always end the matter.

• Check whether the debtor is an individual or a business, and which chapter was filed.

• Note the meeting of creditors date and calendar 60 days from it.

• File a proof of claim if the case calls for one.

• Review how the judgment was obtained to see whether any part could be nondischargeable.

• If the case is dismissed or closed without a discharge, enforcement can resume.

Judgments also keep their value after some bankruptcies. A debtor who is discharged from personal liability can still own property that is subject to a valid lien, and a debtor whose case is dismissed is back where they started.

This post is for general informational purposes only and is not legal advice. If you hold a judgment, contact us at arlingtonlaurel.com.