A question that comes up fairly regularly is whether it is too late to file for Bankruptcy after you have been sued. The answer is no, it is not too late. Most debts, such as credit cards or medical bills, are just as dischargeable after a case is filed or judgment entered as they are before a lawsuit is filed. In some cases, it is a lawsuit or judgment that prompts the Bankruptcy filing. In addition, the instant a Bankruptcy case is filed, lawsuits are automatically halted by the automatic stay. Most creditors abandon or dismiss the lawsuit at that point and file a claim in the Bankruptcy case.
However, if the overall financial situation is such that Bankruptcy is inevitable and the lawsuit is just one more nail in the coffin, or a large judgment is inevitable, it is wise to consider filing before a judgment is entered.
From a practical standpoint, it saves the time and expense of defending a lawsuit and it keeps a judgment from being entered on a credit report for several years (even if the judgment debt is later discharged). In addition, under Georgia law, a recorded judgment is automatically a lien on the debtor’s real and personal property. If a Bankruptcy case is filed after the judgment lien attaches to the debtor’s property, the debtor’s lawyer will have to file a motion to avoid the lien pursuant to Section 522 of the Bankruptcy Code to the extent it impairs an exemption. For example, if a client owns furniture and household goods worth $3,000, has exemptions available for the entire value, and has a judgment lien in the amount of $25,000, the lien can be avoided because it impairs the exemption. The personal property is, therefore, protected after the Bankruptcy case is over. Since the judgment debt will be discharged in the Bankruptcy case, the judgment lien is essentially legally ineffective from that point forward.
This, unfortunately, is not the end of the issue for many people who have been through lawsuits and Bankruptcy. Even if the person has received a discharge of the judgment debt, and whether or not a portion of the lien has been avoided in the Bankruptcy case, the judgment lien will still exist in the county records in Georgia. If the person later tries to get a loan to purchase a house, they may be surprised that the lender discovers the lien in a title search and requires that it be released or marked satisfied before closing on the new home. Of course, the judgment creditor cannot try to collect the debt and the debtor does not want to voluntarily pay the debt. If the lender or title company does not understand that the debt was discharged and the lien is ineffective, and the creditor is not willing to record a release of the lien, the person may be forced to file an action in state court to remove the lien.
For these reasons, if someone is facing lawsuits, or gets served with a lawsuit, and Bankruptcy is a possibility, it is always wise to at least consult with a Bankruptcy lawyer before a judgment is entered.