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Legal Research Library   >  "Discharge" of Judgments...

"Discharge" of Judgments Under Section 524 of the Bankruptcy Code
By Thomson S. Sheh

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One of the most misunderstood sections of the Bankruptcy Code is Section 524 which deals with the effect of a Discharge in Bankruptcy issued to a debtor under Chapters 7, 9, 11, 12 or 13 of the Bankruptcy Code. This section provides that such a discharge, "voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged under Section 727, 944, 1141, 1228, or 1328 of this title, ...etc." (Section 524(a)(1)).

This section also provides that the discharge "operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect recover, or offset any such debt as a personal liability of the debtor, ...etc." (Section 524(a)(2)).

What is the legal effect of this discharge on a docketed judgment lien on real property owned by a debtor prior to bankruptcy? A cursory reading of this statute would lead one to believe that if the judgment debt was duly scheduled in the bankruptcy petition and no objection to the issuance of the discharge was filed by the creditor both the judgment lien and the debt upon which it is based would be wiped out by the bankruptcy discharge. Of course this would be an erroneous interpretation. What is discharged by section 524 is the debtor and not his property. The operative language in this section is the qualifying term "as the personal liability of the debtor". While it is true that a bankruptcy discharge will relieve a debtor from any personal obligation to pay the judgment debt IT DOES NOT DISCHARGE JUDGMENT LIENS ON THE DEBTOR'S REAL PROPERTY. Nor will the discharge enjoin a judgment creditor from executing on the debtor's real property after bankruptcy. All liens (not just judgment liens) on the debtor's property survive bankruptcy unless they are avoided as a preferential or fraudulent transfer or dealt with or avoided under some other provision of the Code. The legal effect of the bankruptcy discharge is to convert the judgment into a non-recourse secured debt which can only be enforced against the real property affected by the judgment lien.

While Section 524 will not wipe out pre-existing judgment liens, it will prevent the judgment from being enforced against any other property of the debtor. For instance we know that docketed judgments attach as liens on real property acquired by a judgment debtor after the docketing of the judgment (see section 5203 CPLR). However, if the judgment debt has been discharged in bankruptcy section 524 will supersede local law and prevent the lien from attaching and enjoin the creditor from attempting to enforce his judgment.

The real problem with Section 524 is a practical one. How can a title examiner know whether or not a docketed judgment has been discharged in bankruptcy? Fortunately there is a state statute, Section 150 of the Debtor and Creditor Law, which deals with this problem. This statute authorizes a debtor one year after the issuance of the discharge to commence a proceeding to obtain an order "directing that a discharge or qualified discharge be marked upon the docket of the judgment". A qualified discharge is obtainable on proof the judgment has been discharged in bankruptcy. An unqualified discharge is obtainable only on proof that the judgment was avoided or set aside by the bankruptcy court. Obviously an unqualified discharge noted on the docket of the judgment can form the basis for an omission of the judgment. A qualified discharge can not be utilized to dispose a judgment lien on the debtor's pre-bankruptcy property. However with respect to real property acquired by the debtor after bankruptcy such qualified discharge can be utilized to dispose of the judgment. (See Bank of New York v Nies, 1983, 96 A.D. 2d 166, 468 N.Y.S. 2d 278).

Tom Sheh is the Riverhead Branch Counsel for Chicago Title and Ticor Title and is considered one of the leading experts in the title industry on bankruptcy and creditor's rights matters.

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