Judgments and Bankruptcy
I frequently get questions about judgments. Some of the questions I’m asked are:
- Must I file bankruptcy prior to being sued?
- Must I file bankruptcy prior to the judgment being filed?
- Is it true that I can’t discharge the debt once there’s a judgment entered?
- Once there’s a judgment, will they take my house?
Confusion abounds. And one of my Skribit questions (look over to the right, middle of this page) prompted me to address these issues.
What is a Judgment?
It’s a piece of paper. What it does is acts as a lien (called a “judicial lien“) on any real estate the judgment debtor (guy or gal who owes the money) has in the county in which the judgment is recorded.
Here’s an example. A sues B in Dorchester County, South Carolina. A gets a judgment for $20,000. A then has a judicial lien against any of B’s real estate in Dorchester County. If B has no real estate in Dorchester County, then A has no lien. However, let’s say B has real estate in Berkeley County. A only has a lien if he records the judgment in Berkeley County.
How Can This Be Fixed?
At first, it seems like a problem. And sometimes it is. But remember this, too. “First in time is first in right.” That means that if there are mortgages recorded prior to the recording of the judgment lien, they have priority. Let’s say we have property worth $100,000 with a mortgage for $100,000. Any judicial lien coming afterward isn’t worth much. Why? Because the lender with the mortgage has priority over the judgment lien creditor. Again, first in time is first in right. So it really might not be a problem.
And if it is, the Bankruptcy Code has a “fix” for the problem. The Bankruptcy Code allows a debtor to “avoid” a judicial lien to the extent it impairs the debtor’s exemption in the property. I know what you just heard: Charlie Brown’s teacher–wa, wo, wa, wa, wa, wa with some bla, bla, bla. It’s a mouthful of blather. So let me break it down a bit.
Let’s say you have a home worth $100,000. You owe $50,000 on a mortgage. This means you have $50,000 of equity in the property. (Equity is the value less any liens.) Under South Carolina law, if this is your homestead, you can exempt–or keep–$53,375 in equity. And you have less than that amount, so you’re golden as far as your homestead exemption goes. But let’s say you had a judgment filed in your county for $50,000.
First, we have the mortgage of $50,000 (first in time is first in right). Then we have the judicial lien for $50,000. Well, you don’t look so golden any more. The judicial lien just gobbled up your equity. Ouch!
Fear Not, Section 522(f) Is Here for You
This section says you can “avoid” (set aside) the judicial lien to the extent it (the judicial lien) impairs your exemption in the property. Here, that’s your $50,000 you had prior to the recording of the judgment. You can then file a motion to avoid the lien so you can get back to enjoying your $50,000 equity.
Judgments are Usually Not a Big Deal
So there’s usually nothing to panic about. Sure, filing bankruptcy before the judgment comes will save you a little hassle (no 522(f) motion would be needed), but it’s nothing to fret about. You’re not required to file prior to that lawsuit becoming a judgment.