A lawsuit judgment can indeed be discharged in a Chapter 7 or Chapter 13 bankruptcy in Michigan. However, there are exceptions to this rule.
That is, there are types of debts owed which can result in a Michigan or Federal Court judgment which cannot be discharged in bankruptcy.
This Article will discuss some of these exceptions to bankruptcy discharge. It will go on to discuss when a lawsuit judgment may not be dischargeable.
First, some bankruptcy basics regarding debt dischargeability follow. What is and what isn’t—and why?
What Is the Bankruptcy Discharge?
At the end of the day, a lawsuit judgment is a debt. Debts are dischargeable in bankruptcy.
This is known, as the Dothraki in Game of Thrones would say.
The “discharge” that you get from a Chapter 7 or Chapter 13 bankruptcy case is actually a permanent Federal legal injunction. The “discharge injunction” prohibits creditors from attempting to collect any debt that is discharged in the bankruptcy.
This includes not just refraining from sending bills or invoices through the mail but also other acts constituting collection. Some examples include refusing to release school transcripts, continuing to report a debt as owed on your credit reports, and other “passive aggressive” collection activity.
The discharge injunction works the way it does because it operates, as noted with the power of Federal law.
Bankruptcy in the US is a Federal legal process, governed by the operation of a Federal statute called the US Bankruptcy Code.
Lawsuit judgments and other debts arising from contracts are legal process of state courts and state law, Michigan’s and any of the others.
Federal bankruptcy preempts, or overrules, Michigan and other state court lawsuit judgments and contractual obligations.
This is why bankruptcy is such a powerful response to lawsuit judgments and other debts.
Some Debts Are Not Dischargeable in Bankruptcy
That said, some debts are not dischargeable in bankruptcy.
This is not because a Michigan lawsuit judgment, or any other debt, is “immune” to the bankruptcy discharge. Rather, some debts are not dischargeable because the US Bankruptcy Code provides that they are not discharged.
When the US Congress drafted and enacted the Bankruptcy Code, there were certain debt obligations that those politicians did not believe should be removed through bankruptcy.
Some non-dischargeable debts are classified as such for good reason. For example, child support obligations are not dischargeable in bankruptcy because the US Congress thought that the protection of children was the highest priority.
There are a number of other types of debts not dischargeable in bankruptcy as well.
A lawsuit judgment based on a non-dischargeable debt will not be dischargeable, therefore.
But this is due to the underlying basis of the debt. It is not because it is a Michigan state court judgment.
There is nothing sacred about lawsuit judgments in bankruptcy, in other words.
So which lawsuit judgments are dischargeable? And which aren’t?
Dischargeable Lawsuit Judgments
Most lawsuits that result in a money judgment are dischargeable in bankruptcy in Metro Detroit and elsewhere in Michigan. These lawsuit judgments listed below are typical.
1. Credit Card Debt Lawsuit Judgments (Breach of Contract)
A money judgment due to breach of contract will be dischargeable in Michigan bankruptcy.
Did you apply for a credit card? Sign a promissory note? Agree to repay money loaned to you?
And did you then fail to repay that loan or note balance?
A creditor who sues you for breach of these sorts of contracts will be subject to the bankruptcy discharge.
This sort of lawsuit judgment is, in fact, the primary reason why most people in Detroit, Livonia, Ann Arbor, Farmington, Inkster, Westland, Redford, Northville, and elsewhere in Michigan file for bankruptcy.
2. Landlord Eviction Lawsuit Money Judgments
An eviction lawsuit that results in a Michigan court-ordered money judgment for back rent owed will be dischargeable as to the back rent owed.
However, if you are continuing to reside in the premises after the date on which the bankruptcy is filed, ongoing rents owed for the period of occupation after the bankruptcy filing-date will not be dischargeable. If, ultimately, your landlord files a new lawsuit for the “post-bankruptcy” portion of rents owed, you will need to resolve this lawsuit on the merits.
It will not be “included” in your bankruptcy.
The filing of a Chapter 7 bankruptcy in Michigan will not stay the eviction itself in most cases, also. The non-dischargeable judgment of possession itself is discussed further below.
3. Medical Debt Collections Lawsuit Judgments
Medical debt is contract-based debt no different than a credit card obligation. You sign paperwork at the hospital or your doctor’s office promising to pay for services rendered, after all. That is a contract.
If you don’t pay, your doctor or hospital or insurance company will very quickly become one of your most merciless creditors. The medical debt collection agencies retained by health services providers will hound you to the grave over $1.00 in medical debt any chance that they can.
If you don’t pay, they will sue. They will garnish. They will drive you into Chapter 7 or Chapter 13 bankruptcy.
However, that is to their detriment.
A Michigan lawsuit judgment for collection of medical debt is entirely dischargeable in bankruptcy.
4. Mortgage & Auto Loan Deficiency Lawsuit Judgments
A deficiency debt is the unsecured balance owed after the collateral property “securing” a secured debt is foreclosed, repossessed, or seized and then auctioned off.
If the property is auctioned for less than the contractual amount you owe on the security contract, the remaining balance is called a “deficiency debt.”
For example, imagine that you own a home worth $50,000 but owe $100,000 on the mortgage secured by the home (the collateral). You miss several monthly mortgage payments, and the home is foreclosed. As part of the usual Michigan foreclosure process, a sheriff’s sale auction is scheduled at which the home is auction for its market value of $50,000.
The remaining $50,000 owed on the mortgage in this example becomes an unsecured deficiency debt.
Just like any other debt, it can be collected by the creditor or some debt-buyer who purchases the note (or claims to purchase it). If you don’t pay the amount owed, you can be sued for collection of the deficiency debt.
A judgement arising from such a lawsuit is a deficiency lawsuit judgment.
A deficiency lawsuit judgment is just, post-auction, another unsecured debt that can be totally blown away by a Michigan bankruptcy discharge.
Non-Dischargeable Lawsuit Judgments
So what lawsuit judgments cannot be discharged in bankruptcy?
Some examples follow.
1. Injunctions or other Non-Money Judgments
Bankruptcy discharges debt. Debt means that you owe money to somebody, naturally.
What if your neighbor sues you in Wayne County Circuit Court to stop you from building a fence on her side of your mutual property line?
The judgment that the County Judge issues not for money damages (because the fence hasn’t been built yet) but is an injunction, or court order, prohibiting you from building your fence on her property.
A bankruptcy will not help you with this non-money lawsuit judgment. Or any other non-money judgment.
These sorts of judgments will remain the jurisdiction of the Michigan County Circuit Court that issued them.
2. Eviction Judgments/Judgments of Possession
Remember our discussion of back-rent judgments, above?
Most Michigan landlord-tenant eviction judgments actually do not result in money judgments. Instead, the landlords are largely simply attempting to obtain a court order entitling them to recovery of their premises.
They want the tenant out, primarily. (They can still sue for back rent owed later on, as needed.)
A judgment of possession issued by a Michigan district or circuit court prior to the date of the bankruptcy’s filing will not only not be “discharged” in the bankruptcy but it will also not be affect by the automatic stay injunction that stops most debt collection when the bankruptcy is filed. (Unless very specific steps involving a deposit placed with the Bankruptcy Court Clerk are followed.)
Filing bankruptcy will only very temporarily stop an eviction if the judgment of possession has been issued prior to filing. If it hasn’t, it will slightly less temporarily halt the eviction—but not by much.
3. Child or Spouse Support Awards
Any divorce or other lawsuit judgment entitling a child or former spouse to support payments will not be dischargeable in bankruptcy.
Child support collections will also not be stayed by the automatic stay injunction.
4. Student Loan Collections Lawsuit Judgments
Except under very specific circumstances that are outside the scope of this Article, student loans are not dischargeable in bankruptcy in Michigan and in the other states sitting in the Sixth Circuit.
Unlike child support obligations, student loan collections are stayed by the automatic stay and by the filing of a bankruptcy case.
However, unless the dischargeability criteria are met (which involves the filing of a lawsuit against your student loan creditors within your bankruptcy case), lawsuit judgments arising from student loan obligations are not discharged at the end of the process.
Thus, short-lived Chapter 7 bankruptcies are generally insufficient solutions to student loan debt. A Chapter 13 bankruptcy will enable you force the student loan creditors to accept affordable payments for 3-5 years (albeit with interest accruing all the while).
Consult a Livonia, Michigan Bankruptcy Attorney for Lawsuit Judgment Discharge
There are other examples of lawsuit judgments that will not be dischargeable in bankruptcy as well.
If you are considering filing for bankruptcy in Livonia, Westland, Inkster, Detroit, Redford, Farmington Hills, Ann Arbor, Monroe, Southfield, Flint, Bay City, and elsewhere in southeast Michigan, it is essential that consult an experienced attorney.
A bankruptcy lawyer will be able to tell you at your initial consultation, in most cases, whether a specific lawsuit judgment vexing you will be dischargeable in bankruptcy or not.
Attorney John Hilla of The Hilla Law Firm PLLC has successfully represented hundreds of clients through Chapter 7 and Chapter 13 bankruptcy processes in Michigan.
Offering free, virtual consultations and friendly, one-on-one service from Livonia bankruptcy attorney John Hilla, we will ensure that your matter is handled properly, competently—and with kindness.