Should I Vacate a Money Judgment, Settle the Judgment, or File for Bankruptcy?

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Bankruptcy  expert  Leon Bayer answers  real-life questions.

Dear Leon, 

I have a credit card judgment against me for $20,000. I am trying to improve my credit and am wondering what to do. Should I try to vacate the judgment, settle with the judgment creditor, or file for Chapter 7 bankruptcy? 

Here are the facts. I did default on payments for the credit card that is the subject of the judgment.  However, I can prove that the judgment creditor did not properly serve me with the lawsuit. I also have lots of other old credit card debt, but the statute of limitations for suing has passed on those and they will fall off my credit report in a year. 

I spoke to Lawyer #1 who will charge me $2,000 to represent me in a motion to vacate the judgment based on the fact that I was never properly served with the lawsuit. He feels I have a good case for that to be granted.  

I spoke to the lawyer for the judgment creditor. The creditor will take $8,000 as a full settlement of the judgment. I have enough money to do that, but then the judgment (even though paid off) will remain on my credit record for many years to come. I’d like to avoid that. 

I spoke to Lawyer #2 who will charge me $2,000 to represent me in Chapter 7 bankruptcy. The bankruptcy will damage my credit, but save me $6,000. 

What’s the best course of action to improve my credit?  Vacate the judgment? Settle the judgment? File for Chapter 7 bankruptcy?  

Yours truly, 

Alfred

Dear Alfred,

Your best course of action might be to settle the judgment for $8,000 and get the judgment creditor to agree to try to vacate the judgment as part of the settlement (perhaps by kicking in a little more money). If you just vacate the judgment, you’ll eventually be back in the same boat you are in now – owing a judgment. And if you file for bankruptcy, that will remain on your credit report for ten years.

Below are details on each of these options.

Vacating the Judgment

Winning a motion to vacate the judgment doesn’t mean you’ve won the underlying lawsuit. It just means that you now have an opportunity to answer the lawsuit and fight it in court. But if you owe the money that is the subject of the lawsuit, it’s reasonable to assume that you will eventually lose the case and have a judgment entered against you. On top of that, you’ll be out an additional $2,000 for the fees you paid your lawyer. For this reason, vacating the judgment is probably not a good strategy.

Settling the Judgment

I agree with your credit concerns about settling the judgment for $8,000. The judgment will stay on your credit report for ten years. Even if your credit report shows that you paid it, the damage is done. (Learn how long negative information will remain on your credit report.)

Filing for Chapter 7 Bankruptcy

Chapter 7 bankruptcy is cheaper than settling, since you’ll pay just $2,000 to your lawyer rather than $8,000 to the judgment creditor. However, bankruptcy, like a judgment, will stay on your credit report for ten years.

How long ago was the judgment entered against you?  If it was entered some time ago, then it will fall off your report sooner than will a bankruptcy. (For example, if the judgment was entered five years ago, it’ll come off your report in five years. If you file for bankruptcy today, it’ll come off your report in ten years.)  If that’s the case, the bankruptcy will damage your credit for a longer period of time than will the judgment.

A Fourth Option: Get the Creditor to Vacate the Judgment as Part of the Settlement

Here’s another idea to try. Tell the plaintiff’s lawyer that you’ll settle the judgment for $8,000 but that as part of this settlement the creditor must:

  • make a good faith effort to vacate the judgment, and
  • if successful, dismiss the lawsuit.

If it all works out, the debt will be resolved and you won’t have a judgment on your credit report.

The creditor’s lawyer will be reluctant to agree, because this route will require extra work. So be ready to sweeten the deal and make it worth the lawyer’s time. Offer more money, say $1,000, to cover the creditor’s expenses incurred in making the motion to vacate the judgment and dismissing the lawsuit. If successful, the extra money you pay will be a drop in the bucket compared to the benefit you’ll get for your improved credit report.

Other Considerations When Settling a Debt

Here are a few other things to think about when settling the judgment.

Bon voyage on your quest for good credit!

– Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

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