Do You Have to Pay Judgment Settlements if You File Bankruptcy?

Court judgments for delinquent debts require a defendant in a debt lawsuit to pay a specific amount of money. However, settlements are possible even after a judgment. A debt collector may agree to a settlement featuring monthly payments covering the entire balance. Typically, settlements are for less than the full balance, but a debt collector with a judgment has the leverage necessary to demand full payment. Debtors who do not want to pay judgment settlements can terminate the agreements by filing for bankruptcy. Whether or not the debtor ends up paying any or some of the judgment in bankruptcy depends on the type of bankruptcy.

Protection

All forms of bankruptcy immediately halt debt collection efforts, including garnishment and enforcement of judgments and settlement agreements. That provision is a key reason why some people with court judgments file for bankruptcy. After receiving judgments, debtors may realize that they simply cannot afford to pay the debt collector, even with the help of a settlement agreement. Bankruptcy stops debt collectors from collecting the day that the debtor files the bankruptcy application.

Chapter 7

Chapter 7 bankruptcy eliminates court judgments for unsecured debt such as credit cards. People who qualify for Chapter 7 can eliminate unsecured debt in several months. It is possible for someone to rack up $25,000 in credit card debt, receive a court judgment for the entire $25,000 and wipe it all out in Chapter 7 in months. Chapter 7 can erase the debt even if the debtor and the debt collector agreed to a settlement.

Chapter 13

Chapter 13 is another form of bankruptcy but requires a payment plan lasting three to five years. People who choose Chapter 13 reorganize their debts with the help of a bankruptcy trustee, who closely monitors the debtor's spending. The trustee's goal is direct as much of the debtor's money as possible to creditors, including debt collectors with judgments and settlement agreements. The bankruptcy court allows the debtor certain allowances for living expenses, with the rest going to creditors. However, unsecured creditors with judgments receive nothing if the debtor does not have any money left after court-approved living expenses. Or the creditors may receive only a portion of judgment balances over the three to five years.

Drawbacks

Bankruptcy does provide some advantages, but it has many drawbacks as well. Filing for bankruptcy severely harms credit for years, with the bankruptcy filing remaining on credit reports for 10 years. Also, employers looking to fill certain jobs may choose not to consider people who have filed for bankruptcy.