Owing money to creditors can be incredibly stressful. However, the harassing phone calls and threatening letters may only be the beginning. When a person owes another party money but does not or cannot pay, the creditor can attempt to obtain a judgment against the debtor and collect the money owed.
A judgment is an order issued by a court, stating that the person named in the case must repay the debt that’s owed. If a creditor obtains a judgment in court, they can pursue a variety of options to get the money they are owed, including wage garnishment, levying assets, or placing a lien against any real estate owned by the borrower.
However, creditors are not allowed to seize the assets of someone whom a court order declares “judgment proof.” Essentially, being judgment proof means that the borrower does not have sufficient assets or income to repay the debt that’s specified in the case.
The designation of judgment proof can be confusing because it doesn’t prevent a judgment from being ordered. No, a judgment is still entered in the books, and the debtor still has a judgment against them — but the creditor or debt collector is prevented from collecting from the debtor.
While not necessarily permanent, judgments can last a long time. And someone's judgment proof status can change if their financial situation improves over time. So, it is crucial for those who owe a significant amount of money to understand the nuances of how these cases and default judgments work.
By taking steps now, any individual can come up with a plan that will maximize their income and assets, while minimizing the chances of a creditor being able to come after their assets.
Not everyone who has a ruling issued against them can be legally required to repay the judgment debt. Those who absolutely cannot pay the debt are often considered judgment proof.
Generally, lower-income people are most likely to be considered judgment proof, because those who have assets or income will be required to use those funds to repay creditors.
Someone can be declared judgment proof if they meet the following criteria:
They do not own assets such as bank accounts, vehicles, real estate, investments, etc.
They do not work, or have a very low-paying job.
They do not have any other source of non-exempt income, such as Social Security, disability, or unemployment benefits.
So, those who are most likely to be found judgment proof are those who find themselves in the following situations:
Those who do not work and receive federal benefits as their only source of income
Those working at a low-paying job that barely provides enough income to pay the bills
Those who are living with a serious disability
Those who are unemployed and do not expect to get another job
Of course, others may also be considered judgment proof. However, anyone who owes creditors a significant amount of money and is concerned about their status should consult with an experienced attorney for immediate assistance.
When a court determines someone is judgment proof, the ruling made in their case will still be valid, but a debt collector will not be allowed to take any steps to collect the debt.
This scenario can play out in one of two ways. First, the debtor may contest the judgment in court and lose. In this case, the court will enter a judgment.
The second way is when the debtor ignores the creditor's lawsuit, and the court eventually enters a default judgment against the debtor, anyway. This ends up having the same effect as if the person had contested the case and lost.
Either way, a judgment is entered into the legal books. Next, the judge will assess the debtor’s assets, financial situation, and ability to pay — or lack thereof. If they meet the criteria above, the debtor will be declared judgment proof. (If not, they must figure out some way to pay.)
Once this happens, the judgment against the debtor can remain intact for years, essentially waiting in the wings until something changes. State laws vary on how long such an order remains valid; however, most states allow a creditor to renew it several times.
Thus, a debtor with a default judgment against them is not necessarily in the clear, even if they have judgment proof status. If their financial situation improves while the order is still valid, a creditor may be able to come after their assets or income, all over again.
Frequently, creditors will still try to collect a debt from someone who is judgment proof. They may make threatening phone calls or imply that they’ll take further legal action.
However, if someone is judgment proof, they cannot be forced to go on a payment plan or take any other actions at the urging of the creditor. Debtors who are judgment proof should not agree to a payment plan out of fear of a creditor's threats; their status overrules a creditor's authority to force them to pay back the debt.
Of course, for those who anticipate that their financial situation may improve in the future, being judgment proof offers little solace. For example, if someone gets a better-paying job or receives an inheritance, they may no longer be considered judgment proof. In this situation, a creditor may be able to come after their assets — even years later.
One option for those who find themselves in this situation is to consider applying for bankruptcy. By filing for bankruptcy, most or all of a person's debts are erased. Thus, if a person files for bankruptcy and then realizes an improvement in their financial situation, their creditors are out of luck.
Establishing that one is judgment proof requires that they meet two criteria:
Low or no income
Little to no assets
To be judgment proof, someone must have little to no income. For the most part, those who have a regular income through legitimate jobs will not qualify.
However, not all income is treated the same. A judgment creditor cannot attempt to seize exempt income that a person receives from one of the following sources:
Social Security benefits
Public assistance benefits, such as WIC, SNAP (food stamps), or housing vouchers
Supplemental Security Income (SSI) benefits
Unemployment benefits
Certain other federal benefits
Child support
Not only are there certain types of exempt funds, but there are also limits on the percentage of a person's pay that a debt collector can take. Thus, even those who do have a job may still be considered judgment proof.
This is because, under federal law, any creditor can only claim the lesser of: 1) up to 25 percent of a person's disposable income; or 2) the amount of a person's wages that equals more than 30 times the federal minimum wage.
Thus, if a judgment debtor works but can barely cover expenses and is unable to save money, they will be considered judgment proof.
The second criterion for being judgment proof is that the debtor must have little to no assets.
If a creditor obtains a judgment against a debtor, they will attempt to collect the money in any way possible. This may include wage garnishment, property liens, and property levies. Creditors can be unscrupulous when collecting on a debt; they will target real estate, bank accounts, vehicles, and anything else they can get their hands on.
Frequently, a judgment creditor will petition the court to freeze the money in the debtor's bank accounts. Once frozen, the court order can dictate that those funds be levied and used to satisfy the debt.
However, even those subject to a valid creditor judgment are allowed to keep up to two months of qualifying benefits in a bank account. Thus, if a judgment creditor seizes a bank account containing this kind of exempt money, those funds must be returned to the bank account.
Judgment proof status is not always permanent. If someone's financial situation improves, they may no longer be eligible. Any new wages they make may become subject to garnishment or their new property subject to liens, etc.
Thus, even those who believe themselves to be judgment proof should not necessarily ignore debt collection efforts such as phone calls and letters.
For some people who owe creditors money, it is better to avoid a judgment from being entered in the first place. A judgment can last for a long time — up to 20 years in some states. And depending on the state, a debt collector may be able to renew multiple times, essentially meaning that the suit might never go away.
So, if someone expects their financial situation to improve measurably, it’s best to either address the debt before the creditor seeks a judgment or to fight it in court.
For those who do not expect their financial situation to improve, it may be advisable to allow the court to enter a default judgment. Consider the following example:
John owes creditors $100,000. He acknowledges the debt and knows that it’s legitimate. John worked most of his life, but then suffered serious injuries in a car accident.
While John did not obtain any personal injury settlement proceeds from the accident, he did begin to obtain several federal benefits after the accident. He does not own his home and does not have a bank account. Federal benefits are his only form of income.
For John, it may make sense to ignore the creditor's lawsuit and allow the court to enter a default judgment. This would save John the time and expense of fighting, when he would likely inevitably lose.
By allowing the court to enter a default judgment, John concedes that the debt is legitimate and acknowledges he is responsible for it. However, because he is judgment proof and believes his financial situation will never change, the creditors will not be able to collect from him.
Of course, before considering this type of solution, someone should consult with an experienced debt collection attorney to ensure they don’t run afoul of other laws by ignoring a court summons or subpoena.
Another option for John is to declare bankruptcy. Once completed, a Chapter 7 Bankruptcy can eliminate most of a filer's debts. However, certain debts cannot be discharged through bankruptcy, such as:
Child support
Spousal support or alimony
Student loan debt
Some tax debt
Certain credit card debt incurred within 90 days of filing for bankruptcy
Debt incurred based on fraudulent acts
For many individuals who find themselves in over their heads with mounting debt, bankruptcy is a good option. When someone with income or assets files for a Chapter 7 bankruptcy, all of their non-exempt assets are sold to cover their debts.
However, those who have only exempt property may keep their assets that fall under property exemption criteria in the bankruptcy code. Bankruptcy exemptions vary by state but generally allow filers to retain thousands of dollars' worth of assets. These can include an interest in real estate, a vehicle, personal property, and, in some cases, a limited amount of cash.
Of course, before considering filing for bankruptcy, it is essential to consult with an experienced bankruptcy attorney to determine discharge eligibility of all debt.
Facing mounting debt is stressful and anxiety-inducing. And it can happen to even the most financially responsible people through no fault of their own. However, individuals in this position may find peace of mind with a greater understanding of the process.
By working with an attorney who is knowledgeable and experienced in debt collection and bankruptcy, individuals can better understand their options and what may lie ahead. There are almost always workable options for those who take action in advance.
