For the average person, a judgment or lawsuit is a scary thing. This is not just someone calling you for collection or sending you past due notices. Somebody is using the legal system and the courts to collect money from you. You feel like you are at their mercy. What happens if you can’t repay what you owe or if doing so would cause undue personal financial hardship? Can you file bankruptcy if you are being sued?
Filing bankruptcy discharges most unsecured debts.
In most cases, a debt arising from a judgment lawsuit can be discharged and an existing lawsuit is stopped as soon as you file bankruptcy. Even if your creditor has already taken action to garnish your wages, the garnishment can be stopped once your bankruptcy is filed with the government.
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How a judgment or lawsuit works
A judgment is a court order that confirms that you owe a creditor a debt.
Creditors may apply for a judgment for an unpaid debt. Or you may be sued as a result of a lawsuit from a mishap, injury, business loss or other event. Regardless, the process of establishing that a debt is owed and collecting on that debt is the same.
There are three basic steps in the judgment process:
- It begins with a creditor or lawyer sending you a legal document called a statement of claim.
- If you ignored this notice and don’t defend the action, or you lose your defense in court, the judge will award a judgment to the plaintiff. This judgment means that the court has now confirmed that you owe this debt, and this carries a lot more weight.
- The creditor can now take this piece of paper and try and collect from you.
- If they know where you work, they can contact your employer and start a garnishment against your wages.
- If they know where you do your banking, they can seize all the cash in your bank account to collect on judgment debts.
- A judgment creditor can also gain an execution order to seize and sell your assets.
A few other facts you should know about judgments and garnishments:
- you can’t go to jail for not paying your debts;
- certain income cannot be garnisheed including social assistance, employment insurance and both government and private pension;
- in Ontario, a creditor can only garnishee up to 20% of your wages (50% for garnishments issued by the family court);
- in contrast, a creditor can seize up to 100% of your bank account to enforce a judgment for outstanding debts.
Read more: Why change your bank account
Bankruptcy stops a judgment
Filing a consumer proposal or bankruptcy provides a stay of proceeding which stops most creditor actions for judgment debts including garnishments and can unfreeze a bank account.
There are exceptions. Certain debts are not eligible for discharge in a bankruptcy including debt related to fraud or misrepresentation, court-imposed fines, student debt less than 7 years old, and child support or alimony. Neither a judgment debt or garnishment can be stopped for these debts.
However all other judgment debts can be eliminated through both a bankruptcy and a consumer proposal.
Read more: How to stop a wage garnishment
Act before a lien is placed on your property
Bankruptcy can stop a wage garnishment, even one that is in process. It can also stop most creditors from taking money from your bank account, the only exception being if you bank where you owe money. However, bankruptcy does not deal with secured debts. That means if your creditor places a lien on your home or other property, they will be entitled to continue to seize and sell those attached assets even if you file bankruptcy.
If you have received a judgment order that you cannot pay, talk to a Licensed Insolvency Trustee to find out how a consumer proposal or bankruptcy can help in your situation.