Can you file bankruptcy in order to discharge a deficiency judgment?

When a car or other personal property is repossessed or a home is foreclosed on, the creditor may have the right to seek a deficiency judgment against the borrower.  To obtain a deficiency judgment, the creditor must file a lawsuit and appear in court to prove the loss it suffered as a result of the borrower’s default.  If the creditor is successful in proving its case, the court will enter a judgment, known as a deficiency judgment, in its favor.  Once a creditor obtains a deficiency judgment, it may garnish the borrower’s wages and levy on his bank account and other property. 

In the majority of cases, the creditor will aggressively seek to collect the deficiency from the borrower before it files suit. If collection efforts fail, it’s extremely likely that the creditor will file a lawsuit as a last resort.   It’s best to file bankruptcy before the creditor obtains the deficiency judgment.  If you file a Chapter 7 case, the deficiency will be treated as an unsecured debt and will be discharged.  If you file Chapter 13 bankruptcy, the deficiency will be treated as a general unsecured debt and will receive a pro rata share of the funds allocated for payment to general unsecured creditors. 

Generally, judgment liens, including deficiency judgments, attach to all of a consumer’s property. Therefore, if you wait to file bankruptcy until after the creditor has obtained a deficiency judgment, that debt will be treated as a secured debt.  This means that the deficiency judgment may not be discharged unless you file a Motion to Avoid Lien.  A qualified bankruptcy attorney can explain to you what a Motion to Avoid Lien is and assist you in filing the motion if doing so is appropriate in your case.