Does Bankruptcy Wipe Out Judgments?

Bankruptcy eliminates judgments more effectively than any form of debt management. Judgments are wiped out in just months through Chapter 7 bankruptcy and over three to five years in Chapter 13 bankruptcy. Filing for bankruptcy offers immediate protection from judgments while your debts are reorganized with the help of a federal bankruptcy court. Debt collectors must immediately stop all collection efforts, including garnishment of your bank account or wages.

Pros and Cons

The Federal Trade Commission indicates that bankruptcy is the most powerful tool available for eliminating judgments and other debt, but warns that it presents disadvantages for consumers. Filing for bankruptcy ruins your credit for at least a few years, making it difficult to qualify for new credit at reasonable interest rates. Bankruptcy is listed on your credit report for up to 10 years, and could hurt your chances for employment in certain professions. People with bankruptcy information on their credit reports may not qualify for jobs in accounting, banking, insurance and similar professions related to financial management.

Bank Garnishment

A judgment is a legal decision reached in court by a judge and can lead to garnishment of your bank account or wages. The judge reaches his decision on a judgment after hearing testimony in a lawsuit over an unpaid debt. Illinois Legal Aid reports that debt collectors almost always win in court if they prove that you owe the debt and failed to pay it. The judgment allows the debt collector to immediately request garnishment of your bank account or wages to satisfy the debt. Garnishment can be a traumatic experience, as it allows for your bank account to be frozen by the debt collector. You'll have no access to the account except to deposit money, while the debt collector is allowed to make a lump sum or multiple withdrawals from the account to pay off the judgment.

The Automatic Stay

Once you file for bankruptcy a judge will sign a court order called an "automatic stay." The automatic stay puts all collection efforts on hold---including garnishment---while the court reviews your bankruptcy petition. The automatic stay is so powerful that some people file for bankruptcy within days of their accounts being garnished.

Eliminating the Judgment

Receiving protection under the automatic stay is just the first step in wiping out a judgment. The bankruptcy must be successfully completed for the debt to be eliminated. Bankruptcy cases can be dismissed because of procedural errors, failure to comply with a payment plan or providing misleading or inaccurate information to the courts. If the bankruptcy is dismissed, the automatic stay is also wiped out and debt collectors are allowed to immediately resume collection efforts, including garnishment. On the other hand, all judgments will be wiped out, or discharged, once the bankruptcy is officially completed.