Does Chapter 13 Get Rid of Judgements?

A legal judgment represents a formal court order establishing that one party owes money to another. Chapter 13 bankruptcy, conversely, offers individuals a structured repayment plan to address their debts. This process allows debtors to reorganize their financial obligations under court supervision. The interaction between these two legal frameworks dictates how judgments are handled within a bankruptcy proceeding.

Understanding Judgments and Chapter 13

A judgment is a judicial declaration that a specific amount of money is owed by one party, the judgment debtor, to another, the judgment creditor. This court order provides the creditor with tools to pursue collection, such as wage garnishments, bank account levies, or the placement of a lien on the debtor’s property. A judgment is distinct from the original debt itself; it is the legal confirmation of that debt, enabling aggressive collection actions. Without a judgment, creditors typically cannot employ these methods.

Chapter 13 bankruptcy, often referred to as a wage earner’s plan, allows individuals with regular income to repay debts over an extended period. This repayment plan typically spans three to five years, depending on the debtor’s income relative to the state median. The primary goal of Chapter 13 is to enable debtors to retain their assets while addressing their financial obligations. Upon successful completion of the plan, eligible remaining debts are discharged.

How Chapter 13 Addresses Unsecured Judgments

Most unsecured judgments, such as those arising from credit card debt, medical bills, or personal loans, are treated similarly to other unsecured debts within a Chapter 13 repayment plan. These judgments typically lack specific collateral tying them to a piece of property. Upon filing for Chapter 13, an automatic stay immediately goes into effect, halting most collection actions, including wage garnishments and bank levies related to these judgments. This legal injunction provides immediate relief by stopping creditors from initiating or continuing collection efforts.

Within the Chapter 13 plan, debtors propose to pay a percentage of these unsecured judgments, which is determined by their disposable income and the value of their non-exempt assets. The plan must ensure that unsecured creditors receive at least as much as they would in a Chapter 7 liquidation. Creditors must file a claim to participate in distributions from the bankruptcy estate.

Once a debtor successfully completes all payments in their Chapter 13 plan, any remaining balance on these unsecured judgments is discharged, meaning the debtor is no longer legally obligated to pay that portion. The automatic stay remains in effect until the plan is confirmed or for its duration, ensuring creditors comply with its terms.

How Chapter 13 Addresses Secured Judgments and Liens

Judgments become secured debts if the creditor records the judgment, creating a judicial lien on the debtor’s real estate or personal property. This lien provides the creditor a claim against the property, allowing them to potentially force its sale to satisfy the debt. Chapter 13 bankruptcy offers mechanisms to address these secured judgments and associated liens, which can be more intricate than handling unsecured debts.

One significant tool in Chapter 13 is “lien stripping,” which applies to junior liens on a debtor’s primary residence. If the fair market value of the home is less than the balance owed on the first mortgage, a second or third mortgage, or a judicial lien, can be reclassified as an unsecured debt. This means the stripped lien is no longer secured by the property and is treated like other unsecured debts in the repayment plan. Upon successful completion of the Chapter 13 plan, this stripped portion of the debt is discharged.

Chapter 13 also allows a “cram down” for certain secured judgments on other property, such as investment properties or vehicles. A cram down reduces the secured portion of a loan to the collateral’s fair market value. Any amount owed above the property’s value is then reclassified as unsecured debt. For vehicles, this applies if the car was purchased at least 910 days (approximately 2.5 years) before the bankruptcy filing. The interest rate on the secured portion may also be reduced to a court-determined rate.

Judgments That Are Not Discharged

Certain types of judgments are generally not dischargeable in Chapter 13 bankruptcy. This means the underlying obligation typically survives the bankruptcy process, even if a repayment plan addresses a portion of it.

Non-dischargeable judgments typically include:
Domestic support obligations, such as alimony and child support.
Certain taxes, particularly recent income taxes or those arising from fraudulent returns.
Restitution or criminal fines imposed by a court.
Death or personal injury caused by the debtor’s operation of a motor vehicle while intoxicated.
Debts based on fraud or willful and malicious injury, though creditors often need to demonstrate this through a separate legal proceeding within the bankruptcy case.
Most student loan judgments, with discharge only possible in rare cases of proven undue hardship.

Even if a judgment falls into a non-dischargeable category, the Chapter 13 plan may still require payments towards these debts over its duration. However, any unpaid balance of these specific obligations will remain the debtor’s responsibility after the plan concludes.