We recently posted a discussion of Gaskill v Citi Mortgage, a September 2012 decision by the New Jersey Appellate Division where it denied an application to cancel a judgment under a New Jersey statute allowing that relief any time more than 12 months after a bankruptcy discharge. There is another point the court made: even though the personal obligation underlying a judgment may be discharged and uncollectible against the debtor personally, the judgment creditor can continue to levy on the residence and try to have it sold at Sheriff sale, for another year! At first this sounds surprising, (how can they collect against my house a debt I do not have to pay?) but on this point, the court got it right. As we will see, this is a problem that can be easily prevented.
The reason is that a judgment in New Jersey becomes a lien on real estate until it is satisfied or removed. A bankruptcy discharge does neither. In most cases, the judgment creditor does not bother trying to have the Sheriff levy and sell post bankruptcy. The reason is simple: most houses have no equity or substantial mortgages. Any money from a Sheriff sale on a judgment must first satisfy the existing taxes and mortgages, and few houses have enough equity to risk the sale price being too low to leave anything for the judgment holder.
Happily, if the homeowner is in a position to keep their home after bankruptcy, there is an easy solution. The Bankruptcy Code has a provision for homeowners to “avoid” a judgment lien to the extent it “impairs an exemption”. In most cases this is the case. [There is a seemingly complicated formula, found at 11 USC 522(f)]. For our clients who want to keep their home and have judgments this is an option. The additional cost of these motions (which are rarely challenged) is worth the peace of mind. The result is a federal court order removing the judgment as a valid lien right away.
This little wrinkle is just one of the many “gotchas” that can lie in wait for the unsuspecting and poorly advised debtor. As in so much more in life, when it comes to hiring the right bankruptcy lawyer, “penny-wise is pound-foolish”. The small extra cost to have it done right is worth it.