Bankruptcy is a judgment creditor’s worst nightmare. When judgment debtors declare bankruptcy, collection becomes nearly impossible. Nonetheless, a judgment creditor needs to know and understand his rights in the event his debtor files for bankruptcy under either Chapter 7 or 13.
Chapter 11 bankruptcies also come into play when judgment debtors are business entities. However, that is another topic for another post. This post will deal only with individuals. They have two types of bankruptcy available to them. Let us take a look at both and how they affect a judgment creditor’s rights.
Chapter 7: Liquidation
A Chapter 7 bankruptcy is a liquidation proceeding. It is primarily used as a way to discharge unsecured debts like credit card bills, medical debts, utility bills and the like. In order to obtain court approval, a debtor must demonstrate that he does not have the financial resources to pay, nor does he have sufficient assets or reasonable prospects for a better financial future.
Any assets the debtor does own are categorized as either exempt or nonexempt. Exempt assets are retained by the individual; nonexempt assets are liquidated with the proceeds going to creditors. A Chapter 7 bankruptcy is simple, straightforward, and can typically be completed in 3-4 months.
The Judgment Creditor’s Rights
A Chapter 7 filing automatically puts a stay on collection efforts by any and all creditors. So a judgment creditor must immediately cease all means of collection currently being undertaken. This includes wage garnishment, bank levies, or writs of execution that have not yet been served.
A judgment eliminates a debtor’s legal responsibility for most kinds of dischargeable debts. So in some cases, that makes a money judgment unenforceable. But there are exceptions. For example, a creditor might have attached a judgment lien against a piece of property before bankruptcy was declared.
Judgment Collectors, a Salt Lake City, Utah collection agency that works on money judgments in nearly a dozen states, explains that it is entirely possible for a judgment lien to survive bankruptcy. Why? Because a lien transforms an unsecured judgment into a secured debt. And secured debts are not as easily discharged under Chapter 7.
Chapter 13: Reorganization
A Chapter 13 bankruptcy is a reorganization proceeding. Chapter 13 bankruptcies are easier to obtain because a debtor isn’t trying to discharge his debts entirely. He is only looking for more time to pay for what he owes.
Typically, a Chapter 13 proceeding gives a debtor ample opportunity to come up with a restructuring plan that includes a timeline for repayment. He then has 3-5 years to get his debts settled.
Because a Chapter 13 filing often includes a repayment plan that forces creditors to accept less than what they are owed, remaining balances are generally discharged at the end of the 3-5-year period, provided that the debtor has made all payments required under the discharge plan.
The Judgment Creditor’s Rights
Judgement creditors have more rights under Chapter 13 than Chapter 7. As long as they file the proper paperwork with the bankruptcy court, they will be entitled to receive at least something. The amount they receive and the schedule for payment will be subject to the court-approved plan.
Just as with a Chapter 7 filing, a Chapter 13 filing places an automatic stay on collection efforts. So the creditor would have to cease current collections and wait until the court approves a bankruptcy plan.
Bankruptcy doesn’t make collection impossible, but it is pretty close. That makes bankruptcy an attractive tool to avoid paying a sizable money judgment. With any luck, a court will not approve a Chapter 7 filing.
