I think you will get better responses if I redirect your post to the Bankruptcy practice area. Good luck to you.
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Bankruptcy may be the right choice for you but you really need to meet with an experienced lawyer to discuss your situation and available options before making that decision. In your question you mentioned a lawsuit, your driver's license and eviction, but without specifics. Contact an experienced lawyer and schedule some time to meet with him or her. If you do decide to file bankruptcy, hire a lawyer to represent you.
Only if, after giving an attorney all the facts, can "best option" status be more reliably ascertained.
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This site is for general advice and should not be used in place of obtaining competent counsel to assist you with your problem in light of your circumstances. You indicate that you do not want to lose your home. I don't blame you, I wouldn't either, but trying to save a thousand dollars or so could cost you your home unnecessarily. Even if you have to pay an attorney for his time, if it allows you to save your home, wouldn't that be money well spent? Go see a competent local attorney.
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A motion to vacate the default judgment is an option. There is an extended deadline to file such a motion where you can show that you never actually received notice of the small claims suit. As part of such a motion, you would have to show you had a viable defense. The judgment may be dischargeable in bankruptcy, but it's impossible to know from the facts you presented. If the judgment has been reduced to a lien on your property, the lien would not be dischargeable in the absence of a motion to avoid to it. Consult an attorney.
I agree with the previous responses that the only way anyone can really advise you concerning whether a bankruptcy is your best option would be to meet with a local bankruptcy attorney and review all the facts of your current financial situation. Many will offer a free initial consultation. Aside from that, to answer two of your specific questions: If the default judgment against you is for a debt that would be dischargeable (the local attorney you meet with can determine that), then yes, the entire amount would be discharged (cleared). As far as the DMV is concerned, if by "hold" you mean your license is currently suspended due to the unpaid judgment against you, then if the judgment is dischargeable (see the first part of this reply), then you can get a release of your driver's license by faxing to the DMV a copy of your bankruptcy filing notice, along with a copy of hte schedule showing the creditor/debt concerning the judgment has been listed. You can call your local DMV office to get the fax number to use for sending them this information. Once they see the BK has been filed and the judgment creditor has been properly scheduled, then they will release your driver's license. Again, however, you should consult with and hire a local bankruptcy attorney to handle this for you to make sure everything is done correctly.
Attorney Waters wrote,
"As far as the DMV is concerned, if by "hold" you mean your license is currently suspended due to the unpaid judgment against you, then if the judgment is dischargeable ... you can get a release of your driver's license by faxing to the DMV a copy of your bankruptcy filing notice, along with a copy of hte schedule showing the creditor/debt concerning the judgment has been listed"
In Eastern District of MO, where I practice, the procedures are substantially the same.