Judgment Proof Debtors in the Collections Process & Legal Issues
Even if a creditor goes through the legal process of getting a judgment, they may not be able to get the money that they are owed. While the debtor technically is still liable for the debt, they may not be able to pay it because they have no income or assets. This means that the debtor is “judgment proof.” People who are judgment proof typically have minimal income or are unemployed. They may receive income only from government benefits or unemployment benefits. Judgment proof debtors usually do not have any money in a bank account and do not own their home. In some cases, a creditor will try to seize a debtor’s personal property, but this may not be worth the effort of locating and selling it. Some types of personal property, such as clothes and furniture, may qualify for exemptions from collections under state law.
Income Exempt from Collections
One of the most common methods of collecting on a judgment against a debtor is garnishing their income. This becomes more difficult if the debtor does not have a job. Under federal law, a creditor cannot collect a debt from unemployment benefits, Social Security benefits, Supplemental Security Income (SSI) benefits, or other forms of public assistance. They also cannot take money out of a child support check. People who served in the U.S. military cannot lose their veteran’s benefits, while federal employees and members of the civil service will retain access to their retirement benefits.
If a debtor has minimal income from a job, they may be essentially judgment proof because federal law also limits the amount that can be garnished from a paycheck. It can be no more than one-quarter of the debtor’s disposable earnings and may be less than that in some cases. Your state may provide additional protections for debtors that reduce the amount that creditors can collect from wages even further.
Leaving Judgment Proof Status
Not being able to pay a creditor at the time of a judgment does not mean that a judgment is void. Hopefully, you will be able to rebuild your finances to a point at which you have a stable source of income and have access to more than the bare necessities of life. If you get a job, for example, you will not be judgment proof any longer. The creditor will have the right to collect on the judgment that it received by garnishing your wages. For another example, you may eventually be able to purchase a home or other real estate. Any judgment that a creditor has obtained against you will attach to that real estate, even though it was purchased later.
This is a strong reason not to ignore a lawsuit against you if you believe that you are judgment proof. While it may not mean anything now, you could be on the hook for a long time if a court enters a default judgment against you. If you believe that you have a valid defense to the lawsuit, you need to make that defense in response to the lawsuit, or it will be deemed waived. On the other hand, if you know that you owe the amount that the creditor is alleging, you may prefer to let a default judgment be entered rather than paying costs associated with the lawsuit. Either way, you may want to consult an attorney before choosing your strategy.
