An area commonly misunderstood by both debtors and creditors is the effect of the bankruptcy discharge on judgment liens recorded before the filing of a bankruptcy petition.
Virginia Code § 8.01-455 holds “[a] defendant in any judgment… may, on motion, after ten days’ notice thereof to the plaintiff in such judgment… apply to the court in which the judgment was rendered, to have the same marked satisfied, and upon proof that the judgment has been paid off or discharged, such court shall order such satisfaction to be recorded in the judgment docket book…”
Additionally, § 8.01-455(b) provides that the costs of such a proceeding, including reasonable attorney fees, may be ordered to be paid by the plaintiff. This means that the judgment creditor, the original plaintiff, may be responsible for the reasonable attorney’s fees of the judgment debtor, the original defendant, in any action to mark a judgment as discharged.
A bankruptcy discharge makes a lien ineffective against real property acquired after commencement of bankruptcy proceedings. Although a lien was imposed on all debtor’s real property interests in the county that were acquired after judgment creditor’s judgment was recorded, debtor’s discharge in bankruptcy makes the lien ineffective as to any real property interests in the county that debtor acquired after the commencement of their bankruptcy proceedings. Leasing Serv. Corp. v. Justice, 242 Va. 441, 416 S.E.2d 439 (1992).
Conversely, a bankruptcy discharge would not prevent a judgment creditor from post-discharge enforcement of its lien upon debtor’s real property interest that were acquired before the commencement of the bankruptcy proceedings. Where the creditor’s judgment was recorded before the debtor filed their bankruptcy petition, the judgment continued to be a lien on any interest the debtor may have had in l property despite debtor’s bankruptcy discharge from personal liability for payment of the judgment.
The important question is when was the real property acquired, before or after the bankruptcy petition? If before, the lien is not discharged in bankruptcy. If after, the lien does not attach to the real estate interest and cannot be enforced.
It should be noted that this article only applies Virginia law and does not address the possibility of lien stripping inside of bankruptcy proceedings.
Ronald Page represents clients in the areas of Business and Consumer Bankruptcy, Business Planning, Commercial Litigation, Creditors’ Rights, and Asset Protection. Ronald Page’s Richmond bankruptcy practice includes representing secured and unsecured creditors, trustees, and corporate debtors in insolvency matters, including Chapter 11 reorganizations, business liquidations, loan workouts and personal reorganizations under Chapter 7, Chapter 11, and Chapter 13.