For consumers or small business owners who lost a lawsuit and now have a judgment against them, is bankruptcy the way to go?
What if you caused an accident for which you had no insurance or the insurer refuses to cover you? Would bankruptcy help you discharge this debt?
The simple answer to these question is that a bankruptcy would generally help you by discharging these debts in most cases.
The Automatic Stay
Once you file your petition, the automatic stay provision goes into immediate effect. This prevents any creditor from contacting you and from collecting on their judgments against you. If a wage garnishment or bank levy has been initiated, these must cease and most payments returned.
Which Chapter Do I file?
Most debtors qualify for Chapter 7 but your income must be at or below the median income for your state based on your family size, or you have to pass a means test to see how much disposable income you have after deducting certain monthly expenses. If you do not qualify, your other option is Chapter 13, which is a wage earners’ plan or debt reorganization.
Under Chapter 7, most of these judgments would be dischargeable. Even in a Chapter 13, if the debt is not secured or a priority debt, the amount owed would either be reduced considerably or not paid at all once the secured and priority creditors are paid first.
What Lawsuits are Dischargeable?
Most debtors are sued by credit card companies or for unpaid medical bills. Others may be sued for personal injury, personal loans and mortgage deficiencies after foreclosure. Business owners may be sued for failure to pay business obligations and for breach of contract.
Typically, if you are sued by a secured creditor and lose, you would have to relinquish the collateral secured by the loan plus any deficiency or amount still owed on the loan. States that have judicial foreclosure procedures allow for deficiency judgments unless a state law rules otherwise.
A Chapter 7 bankruptcy would discharge any deficiencies as unsecured debt. Debt owed on a junior or second mortgage would also be dischargeable if the first mortgage was totally secured by the home. A breach of contract action against you would also be discharged unless the party suing you is alleging fraud or misrepresentation of a material fact.
Lawsuit judgments that are not dischargeable include:
Personal injury if caused by intoxicated driving
Debt caused by fraud
Judgment for child support arrearages
Breach of contract caused by fraud or misrepresentation
Court-ordered costs and restitution to victims of a crime
Judgement for unpaid student loans unless you can prove severe financial hardship
Otherwise, most judgments included in a Chapter 7 bankruptcy will prove to be dischargeable. Before filing, though, you should consult with a bankruptcy attorney to determine if bankruptcy is your best option for dealing with a lost lawsuit and which bankruptcy chapter fits your purposes and circumstances.