The Truth of Credit

The goal of a bankruptcy is to obtain a discharge of debts. When a debt is discharged, it is no longer attached against the debtor personally.

However, if you have personal liability for a debt, a creditor with a judgment can use legal processes, like levy and garnishment, to reach your “non-exempt” (not protected by the bankruptcy) assets even though those assets were not pledged as collateral (i.e. unsecured debt). With personal liability discharged the item of property that secured the debt, passes through bankruptcy unless a court order modifies or voids them.

So, after a bankruptcy, a lien may remain a charge on an asset the debtor owned when the case was commenced, but that debt cannot become a lien on any assets that the debtor acquires after the bankruptcy discharge.

Example:

1. A home equity loan remains as a lien on the property after a bankruptcy discharge. If the loan is not paid, the lender cannot sue the discharged debtor to attempt to collect the debt out of current wages because the discharge has eliminated the debtor/borrower’s personal liability for the loan. The creditor can foreclose on the lien on the pledged property, however.
2. A judgment lien may remain a charge on assets owned before the bankruptcy, but does not attach to assets acquired after the bankruptcy is filed.

The TRUTH it’s pretty simple if a creditor has a judgment or lien before the bankruptcy they can still come after the collateral you promised at the time of the loan. Unless the court sees discharges that debt as well. Obviously, when in doubt ask a experienced attorney but I wanted to give you the “Cliff Notes” version here make you aware of a loophole you should consider.

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