Judgments- How They Affect You and How Bankruptcy Can Help

The most immediate effect of a judgment is that it serves as a basis for a creditor to recover money from you and in the very near future. The most common way a judgment is enforced is through an income execution order sent to your employer. This is known as "wage garnishment". In New York State, 10% of your gross salary can be garnished by your average judgment creditor. The second most common way a judgment is enforced is through restraining your bank account for the amount of the judgment (and often for a higher amount, if permitted by NY law). There are rules for how much money can be taken from your account, what funds cannot be taken and how much you may be able to withdraw from your account once the restraint occurs, however, this doesn't change the fact that a restraint can cause you a lot of stress and financial hardship when it occurs.

A secondary effect, which is not often immediately felt by an individual, is how a judgment can affect your real property. The simple explanation is that if a judgment is recorded in the county where you own real property, such as your home, it attaches as a "judgment lien" to your real property. What this means is that you could be prevented from selling your home or re-financing your mortgage, unless you are able to satisfy this additional lien now recorded against the property. Think of it as a second or third mini mortgage against your home...although you are not making monthly payments, when it's time to sell, there has to be enough money available to pay it off. Often times, this satisfaction will be achieved by paying a creditor less than what you owe them in exchange for them issuing you a satisfaction of this debt. However, this can result in 1099 income to you- known as 1099-c income or "cancellation of debt income", which may be taxable to you.

Believe it or not, bankruptcy may be able to help you in this situation. First of all, if filing for bankruptcy is an appropriate option for you, filing your case will put an end to any wage garnishment or bank account restraints. And, if you obtain a discharge, that debt can never be collected upon again against you personally or any other property you may acquire. Furthermore, debt discharged through bankruptcy does not result in 1099 income. That's the immediate effect of a bankruptcy discharge, your personal liability for the debt and collection efforts go away.

However, if you own real property, the lien against your property that was already in place when you filed does not go away unless you take additional actions, if they are available to you in your case, to remove or strip a "judgment lien". This is because absent a court order to the contrary, a lien will survive a bankruptcy discharge. A creditor may not be able to collect against you personally, but if you do not remove the lien, they can collect against the property you owned at the time of your filing. But there is hope because due to the relief available to you under the bankruptcy code, you may be able to strip a judgment lien from your property. In order to know whether this remedy is available to you, you should speak with a qualified bankruptcy attorney who can evaluate your case properly.