I Have A Judgment Against Me, Will Bankruptcy Help?

18 Oct I Have A Judgment Against Me, Will Bankruptcy Help?

I have often been asked if bankruptcy is still an option if a judgment has been entered. Most times, a bankruptcy can still be very beneficial. But, we have to determine the effect of the judgment.

In most states, as soon as a judgment is entered, the judgment lien will attach to real property in the county in which the judgment was rendered. If the judgment was transcribed to other counties, then the judgment will be a lien against real estate in those counties, too. If the property is held as husband and wife or “tenants by the entirety,” the creditor must have sued both husband and wife and the same time in order for the judgment lien to attach to the real estate. But, for our purposes, let’s suppose that there is a valid lien against the real estate.

A big advantage of bankruptcy is that under section 522 of the Bankruptcy Code, a debtor can avoid a judgment lien if it impairs an exemption. Most states allow a debtor to exempt a certain amount of “value” in residential real estate. If the judgment lien has attached to that real estate and “impairs” the exemption, then the judgment lien can be avoided in its entirety and the creditors’ claim is treated as an unsecured claim.

So, how to determine if the judgment lien impairs an exemption.

The Bankruptcy Codes sets for a formula to determine if an exemption is impaired. Under the code, if the lien to be avoided and all other liens on the property and the debtors’ exemption exceed the value of the debtors’ interest in the property, the exemption is impaired and the judgment lien can be avoided in its entirety. So how does this work?

In North Carolina, debtors are allowed to exempt $35,000.00 in equity in real estate (each if jointly titled). So, if there is a judgment against the debtors for $20,000.00 and the property is worth $150,000 with a $100,000.00 mortgage, would the judgment lien be avoided?

Debtor’s interest in house: $150,000.0 Mortgage $100,000.00

Exemption $35,000.00

Judgment $20,000.00

Total: $155,000.00

Because the total of the liens and exemptions on the property exceed the debtor’s interest, the judgment lien can be avoided and the creditor treated as an unsecured debt. This is a unique aspect of bankruptcy.

While hopefully you should discuss your finances with a qualified bankruptcy attorney before judgments are entered, it is nice to know that, under certain circumstances, judgment liens can be avoided under the Bankruptcy Code.


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Adrian Lapas, Esq.

I've been practicing bankruptcy law in North Carolina since 1993, and am certified as a specialist in consumer bankruptcy law by the North Carolina State Bar.
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