Anyone who plays poker knows the importance of the wild card. Having a wild card in your hand changes everything. In the judgment collection game, there is a wild card that every creditor fears: bankruptcy. It can turn an otherwise winning hand into a total loser.
When it comes to the bankruptcy wild card, judgment debtors have the advantage. Why? They are the only ones who can hold it. And when it is played, a judgment creditor it is almost always left on the losing end. Even if a creditor has made the extra effort to be cordial, accommodating, and as nice as possible, the debtor declaring bankruptcy pretty much seals the deal.
Two Types of Bankruptcy
Although there are multiple forms of bankruptcy under federal law, the two that apply most often to judgment collection are Chapter 7 and Chapter 13. A Chapter 7 bankruptcy is a liquidation proceeding. It is the form of personal bankruptcy pursued when a person or couple is sorely lacking the financial resources and assets to pay their bills.
Chapter 13 bankruptcy is a reorganization preceding. The individual or couple is given time to reorganize finances so that bills can be paid. In the interim, all creditors must cease collection efforts. A court must approve any reorganization plan before the individual or couple can move forward.
Discharging Debts
Chapter 7 bankruptcy is worse for creditors because it almost always results in debt discharge. Let us say a person has $500,000 in outstanding debts, no assets of value other than a home and a car, and income of just $50000 annually. There is not a whole lot for creditors to work with. The situation is bad enough that a successful Chapter 7 bankruptcy could ultimately mean the discharge of all the debtor’s debt.
Note that certain types of debts cannot be discharged in bankruptcy. They include things like child support, maintenance payments, tax debts, and that is arising from fraudulent or criminal activity. Unfortunately, most types of money judgments are not included in this small group of exempted debts. Most money judgments can be discharged through Chapter 7 bankruptcy.
A Payment Plan for the Debtor
Not every Chapter 7 case wraps up with all debts being fully discharged. Courts have considerable leeway in figuring out how to apply the bankruptcy statute. It could be that a court decides the judgment debtor does have the financial resources to agree to a payment plan. Such a plan could be ordered.
Payment plans are more common with Chapter 13 bankruptcy proceedings. As part of the debtor’s reorganization, they might offer to make monthly payments on the judgment until it is satisfied. Court approval would set things in motion. As long as the debtor made good on the payment plan, the creditor wouldn’t be able to pursue any other collection efforts.
Proceed With Collection Carefully
Although I am no judgment collection expert, the little bit I know about bankruptcy tells me that proceeding with collection carefully is a wise thing to do. I would probably bring in an agency like Judgment Collectors or leave collection to my attorney. The last thing I would want is to do is something that would trigger the debtor to declare bankruptcy.
Unfortunately, bankruptcy is the judgment debtor’s wild card. With limited financial resources and a sympathetic court, a debtor could very well avoid paying by declaring Chapter 7 in hopes of having the judgment discharged. Even a successful Chapter 13 bankruptcy ties a judgment creditor’s hands. There just isn’t anything good that can come from bankruptcy from the creditor standpoint.
