No, it is never too late. However, waiting until after a judgment is entered may not be a good idea.
Once you file for bankruptcy protection, the automatic stay prohibits creditors from taking any action against you. If you have been sued, this means that the creditor cannot pursue the matter to judgment without asking the bankruptcy court first. So, if you have been sued but a judgment has not yet been entered, that creditor is treated just like any other unsecured creditor.
But, if you waited until after a judgment has been entered against you, then what? First of all, a judgment lien attaches to any real estate that you may own in the county in which the judgment was entered and in the county to which the judgment is transcribed. So, if you own real estate, the debt may have gone from an unsecured debt to a secured debt through a judgment lien.
A lot of times, judgment liens can be avoided because they “impair” a debtor’s allowed exemptions. This means that if you do not have any more equity in your house than you can legitimately exempt, you can “avoid” the judgment lien under 11 U.S.C. § 522. But, if you have more equity in your home than you can exempt, the judgment lien may stay in place. A fundamental tenet of bankruptcy law is that a lien survives the bankruptcy unless it can avoided under the Bankruptcy Code or other applicable law.
Another way to avoid a judgment lien is if you file bankruptcy within ninety (90) days of the date the judgment lien was entered. This will amount to an involuntary transfer of property and the transfer can be avoided as a preference under 11 U.S.C. § 547. Another fundamental tenet of bankruptcy law is to treat creditors of the same class equally and by obtaining a judgment lien ahead of other unsecured creditors, the judgment creditor has improved his position.
So what if you do not file bankruptcy until after the judgment has been in place for awhile? Then, things become tricky. Assuming that you have real estate that is not exempt and the judgment lien attaches to that real estate, the judgment creditor is now a secured creditor and you must deal with the creditor by either surrendering the property or allowing the judgment creditor to have the sheriff sell the property. As you can see, waiting too long to file for bankruptcy can have tremendous adverse consequences.
To be fair, most consumer bankruptcy cases that are filed do not result in assets being sold because most debtors do not have assets over and above what they may exempt. But, if you are facing a situation and you are not sure, particularly if you have been sued but the judgment has not yet been entered, it is worth speaking to a qualified bankruptcy attorney like the ones that contribute to this blog. Just waiting around can have disastrous consequences.
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Last modified: June 16, 2010