When you owe a past-due debt, your creditor can ask you to bring your account current by calling you on the telephone or sending you an email or letter, but it can’t force you to pay your bill without doing more. Before a creditor takes money out of your bank account or sells your property to repay the obligation, a creditor must file a lawsuit against you and prove that you owe the debt. If successful, the court will grant the creditor a money judgment in the amount that you owe. The judgment allows the creditor to use collection tools to go after your assets and satisfy the debt. If you don’t have funds or property that a creditor can reach using the judgment, the creditor can’t collect against you. You’re “judgment proof.”
(To learn more about the debt collection process, see Delinquent Debt: What to Expect in Debt Collection.)
What Can a Creditor Get With a Judgment?
A monetary judgment is a powerful tool. If you have assets—such as money in a savings account or an antique car that you own free and clear—and a creditor has a court judgment against you, the creditor can take steps to take the assets (some assets are off-limits; see below). Typical collection procedures available to a creditor with a money judgment include:
- requiring your employer to take money out of your paycheck (wage garnishment)
- instructing your bank to withdraw money from your account (bank levy)
- selling your home, rental property, or commercial real estate at auction (real estate levy or attachment)
- seizing your car, boat, stock, the contents of your safe deposit box, or other property (personal property levy or attachment)
- instructing the sheriff to take money from your business’s cash register (till tap), or
- directing the sheriff to station an officer in your business, who will collect all payments made by your customers (keeper).
Determining Whether You’re Judgment Proof
In some cases, it’s easy to determine whether you are judgment proof, such as when you don’t have anything of value that a creditor could take from you. Here are a few common characteristics shared by judgment-proof people:
- Judgment-proof individuals have little or no equity in a home or other real estate.
- Judgment-proof people own minimal personal property.
- Judgment-proof people are usually unemployed.
Even if you don’t satisfy all of the above criteria, you still might be judgment proof. That’s because some assets can’t be reached by creditors, so it’s possible to have a source of income or own property and still be judgment proof. For instance, because federal law doesn’t allow a creditor to levy against Social Security funds, a retiree whose only source of income is Social Security might be immune to a creditor’s judgment. (It’s important to recognize that mixing Social Security benefits with other funds in a single account might result in a loss of the protection.)
States also offer additional protections. Each state allows residents to protect, or exempt, a small amount of property from creditors seeking to satisfy a debt. Common examples of exempt property include household furnishings; clothing; a small amount of equity in a modest car; and some, but not all, retirement accounts. You can check your state’s exemption statute to determine whether it will protect your property.
Most creditors understand state property exemptions well and will proceed against assets that you can’t protect. If you’re facing a collection action and aren’t sure about your rights, a knowledgeable attorney can tell you if you stand to lose property and the options available to you.
Considering Bankruptcy When You’re Temporarily Judgment Proof
It’s common to recover after a financial setback, and being judgment proof now doesn’t mean that you’ll be in the same situation six months down the road. If you suspect that your financial picture will improve, you might want to consider filing for Chapter 7 bankruptcy and getting a fresh start while your income is low enough to qualify. Once your income rises, you might make too much money to file for Chapter 7 bankruptcy and find yourself stuck with debt, or might have to repay a portion of your debt through a Chapter 13 bankruptcy repayment plan.
(To learn more about how filing for bankruptcy can help judgment-proof individuals, read Should I File for Bankruptcy if I’m Judgment Proof?)
Questions for Your Attorney
- Do I have any assets that a creditor can take from me or am I judgment proof?
- Could a creditor collect against me if my judgment-proof status changes?
- Should I file for bankruptcy even though I’m currently judgment proof?