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What Happens to Judgments You Hold When Filing for Bankruptcy?

There is always a lot of discussion regarding judgments and bankruptcy. But in most cases, the discussion is all about how to avoid getting a judgment against you for outstanding debt or how to handle a judgment if it’s already in place, etc. What we don’t talk about very much is what happens if prior to bankruptcy, you were awarded a judgment.

If you were awarded a judgment and then you file for bankruptcy, what happens to the judgment?

If you have a judgment against anyone or if anyone owes you any money, it’s important to address the issue before filing for bankruptcy. If you want to protect your right to collect on the judgment or the debt in the future, discuss it in detail with your experienced Southern California bankruptcy attorney before you file.

Generally speaking, you should be able to pursue your judgment after completing your bankruptcy, but it is vital that you disclose information regarding the judgment in the appropriate bankruptcy schedules. The most commonly filed type of bankruptcy is Chapter 7, so we’ll use this type of bankruptcy in our example.

When you file Chapter 7 bankruptcy, a trustee is assigned to your case. The bankruptcy trustee handles your assets during the bankruptcy; doing with your assets those things that you are allowed to do. Assets can be protected from the trustee’s reach, but any unprotected assets can be seized in order to pay creditors. For instance, you could have a $5,000 balance in your savings account. State bankruptcy laws allow you to protect up to $2,000. The remaining $3,000 you could be forced to surrender for the trustee to use to pay back your creditors.

Regarding Judgments you Hold when Filing:

A judgment is an asset and would be treated similarly. It needs to be listed in your schedule of assets. Doing so gives the trustee the right to “act in your stead” and pursue the individual or company the judgment is against in order to collect so the funds can be used to pay back your creditors with the other available assets. Having the right to do so, doesn’t mean it’s going to happen, though. Doing so means spending a lot of time, energy and even money to collect. Many trustees aren’t willing to invest this much when the eventual payout is risky. If the judgment has been in place for years and you’ve been trying to collect with no luck, the trustee will most likely disregard the judgment – seeing it as too much trouble. They assume they won’t have any better luck than you’ve had in collecting.

Once the trustee abandons their pursuit of the asset (or judgment) you are free to renew your efforts to collect on the judgment. The asset has been returned to you.

REMEMBER: When filing for bankruptcy you must list the judgment or the possibility of filing a lawsuit in the schedules provided to the bankruptcy court. Even if no lawsuit has been filed. If you have a potential claim to file, you should list it in your bankruptcy petition.

For additional questions regarding Southern California bankruptcies, judgments, and the bankruptcy process, contact the bankruptcy attorneys at Westgate Law.

About the Author

Justin Harelik

Justin has a singular goal: to get people out of financial distress and move them to financial stability and prosperity. He does this by combining 15 years of in-depth experience in bankruptcy, credit management, debt negotiation and student loan modifications, and he does it with both English and Spanish-speaking clients.

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