How Does Bankruptcy Affect Wage Garnishments and Judgment Liens?

Anytime an individual is sued by a creditor and the creditor prevails in that suit, either by default judgment or after a hearing, i.e., trial, on the merits of the case, the now "judgment creditor" may seek to execute its judgment in any fashion. Most commonly, if the defendant against whom the judgment is entered does not pay the judgment in full to the judgment creditor, the latter may seek to garnish the defendant's wages, up to 25% of the defendant's net income, until the debt is paid off. Assuming the debt is dischargeable, filing bankruptcy will indefinitely stop the wage garnishment, pursuant to the automatic stay. However, the judgment creditor is not required to disgorge the funds it had already successfully garnished. The remaining dischargeable debt would be accordingly discharged in the bankruptcy.

Another way in which a judgment creditor can execute its judgment is by recording a judgment lien against property of the defendant, most commonly real property. A judgment lien is similar in many ways to a mortgage: when a borrower obtains a loan for the purchase of a property, the loan is secured by a deed of trust which is usually recorded against the property the borrower is seeking to buy. In the event of default, rather than having to sue the borrower in court, the lender may execute the power of sale clause contained in the deed of trust by foreclosing non-judicially on the property. Once a judgment creditor records a judgment lien against the defendant's property, it may seek to sell the property, and recoup the money owed to them through the proceeds of the sale. Judgment creditors will generally not impose liens against property unless there is sufficient equity after senior encumbrances (mortgages or liens) are discounted.

If a judgment creditor has a valid judgment lien against property of a debtor seeking to file bankruptcy, getting rid of it can be tricky. Judgment liens are involunary liens, which means they cannot be stripped like a second mortgage or home equity line of credit in a chapter 13.  It is possible to remove a judgment lien, but only to the extent it impairs an exemption.

The best way to explain stripping judgment liens is through example. Let's say the debtor has a piece of property worth $450,000.00. There is only one mortgage on the property, whose balance is $400,000.00, leaving the debtor/owner with $50,000.00 in equity. Creditor has a valid court judgment against the debtor for an unpaid balance on a credit card for $20,000.00, and records a judgment lien against the property, the $50,000.00 in equity being more than enough to secure the lien.  If the debtor files for bankruptcy and applies the homestead exemption to protect his $50,000.00 in equity from being liquidated by the Trustee, he may seek to strip the judgment lien from the property. The reason that he is able to get rid of the judgment lien is because it "impairs" his $50,000.00 homestead exemption. If done successfully, the judgment creditor may not force a sale of the house.

On the other hand, if the debtor's house dropped to $300,000.00 in value after the judgment lien was imposed, he cannot seek to strip the judgment lien because it no longer impairs an exemption, specifically, there is no equity in the property after the first mortgage to exempt. In this situation, the debtor could seek to discharge his personal liability to the $20,000.00 in bankruptcy, but the lien would survive the discharge, and the creditor could sell the house after the bankruptcy to recover its judgment, though a sale would be highly unlikely unless the value of the property increases sufficiently.

Dealing with judgment liens can be extremely confusing. Contact a bankruptcy attorney in your area if you have questions.