By: John B. Newman, Retired

The moment a creditor obtains a judgment against a debtor and it is docketed in Trenton, it becomes a lien on all of the debtor’s real property in New Jersey.  Therefore, the debtor cannot sell or refinance any real property in New Jersey without paying off or obtaining a lawful release of the judgment lien.

However, unless the creditor takes the further step of having the sheriff levy on a specific parcel of real property, the judgment lien is not perfected for the purposes of a bankruptcy.  So, if a debtor files bankruptcy, the debtor or his trustee may void the unperfected judgment lien.

In many cases, the debtor or his trustee will take no affirmative step to void a judgment lien and may, in fact, abandon real property subject to a judgment lien.  The bankruptcy proceeds to conclusion in a Chapter 7 and, for all intents and purposes, the judgment lien will pass “like a stone” through the bankruptcy process.  Once the bankruptcy case is closed, the creditor can immediately pursue its rights under its judgment lien.

There is a relatively little known statute in New Jersey which gives the debtor who has obtained a discharge in bankruptcy the right to void the judgment lien one year after his bankruptcy.  Under this statute, if the creditor does not levy prior to the bankruptcy and takes no steps to do so within one year after the bankrupt obtains his discharge, the debtor may obtain an order voiding the judgment lien, by motion in the original lawsuit in which the judgment was obtained.

The lender has two bites at this apple.  The first is to levy after obtaining the judgment.  The second is to levy after the bankruptcy.

One may wonder why a creditor does not levy automatically upon obtaining every judgment.  There are three reasons.  First, a creditor may not be aware of identifiable real property owned by debtor at that time.  Second, New Jersey law requires that a creditor exhaust personal property before collecting from real property.  Meeting that test varies from county to county and may be an impediment to levying.  Third, in many cases, the bankruptcy intervenes before the creditor can levy.

The message for creditors is to not close that file when the debtor files for bankruptcy or even when he obtains a discharge if there is any real property subject to the creditor’s judgment lien.  As in all collections, the race is to the swift – and the diligent.

This publication is intended for general information purposes only and does not constitute legal advice. The reader should consult legal counsel to determine how the law may apply to specific situations.