If you are trying to collect money from somebody who borrowed money from you or who injured you, or if somebody is trying to get money from you, you may be interested to learn what it means to be judgment-proof.
A person is considered to be judgment-proof when they have no assets that can be successfully reached by a creditor to pay a debt. That may occur when the person has few to no assets of any sort, or when they possess assets or have sources of income that are exempt from being reached by creditors, even if those creditors have obtained a money judgment against them.
Exemptions from collection come in two basic forms: Exemptions from wage or income garnishment, and exemptions from having property seized and sold to be applied to a debt.
Wage Garnishment Restrictions
Garnishment is legal process that allows a creditor to collect money from a debtor. After the creditor obtains a judgment, the creditor may get an order of garnishment from the court, allowing it to collect the debtor's money that is held by third parties. Wage garnishment involves collecting a portion of the debtor's wages from an employer. Garnishment may also occur against financial holdings, such as the funds in checking and savings accounts.
Federal law restricts the amount that may be garnished from an employee's wages, including commissions, bonuses and other income. Wage garnishment occurs against an employee's disposable income, the amount of which is calculated by taking the employee's net income and subtracting certain expenses, including income taxes, FICA taxes, and withholdings for retirement contributions that are required by law. For ordinary garnishments, the amount that may be garnished from a debtor's weekly pay may not exceed the lesser of:
Twenty-five percent of the employee's disposable earnings; or
The amount by which the employee's disposable earnings are greater than thirty times the current federal minimum wage.
States may not permit garnishment of amounts in excess of that federal restriction, but may increase the exemptions. For example, for most debts other than child support or taxes, Texas does not allow any wage garnishment no matter how much a debtor earns. North Carolina, Pennsylvania and South Carolina don't allow wage garnishment for commercial debts, such as debts that result from unpaid credit card bills.
Sources of Money or Income Other Than Wages
For debts other than child support or tax debt, or debts owed to the government, many sources of unearned income are exempt from garnishment. For example, exemptions exist for money received from SSDI, SSI, Social Security retirement benefits, state public assistance and disability benefits, unemployment insurance, child support received by the debtor, VA benefits, and disbursements from student loans.
With some of those sources of revenue, protections extend to the bank accounts into which they are directly deposited; with others, any bank balance above the state exemption may be garnished to satisfy a judgment debt.
Exemptions for Personal Property
All states offer exemptions for personal property, including a motor vehicle, up to defined limits. The amounts of the limits vary by state.
A debtor may also be able to take advantage of a wildcard exemption to exempt from collection certain assets that are valued in excess of the state exemption, by allocating part of the wildcard exemption to that item of property. For example, if a state exempts from collection the first $5,000 of the debtor's car, and the defendant owns a vehicle that is worth $8,000 with no car loan, the debtor may apply $3,000 of the state wildcard exemption to the vehicle in order to keep it out of the reach of creditors.
Retirement savings are broadly exempted from garnishment.
Exemptions for Real Property
State law varies significantly in relation to real property. Every state recognizes a basic homestead exemption for a debtor's primary home, but the amount of the exemption can vary significantly between states.
- Some states make liens against real estate easy to obtain when a plaintiff obtains a judgment, and in some circumstances automatic.
- Other states make it difficult or near-impossible to secure a lien against real estate to enforce a money judgment.
- Some states offer special protections to real property that is owned jointly with a spouse in the capacity of tenants by the entirety, exempting the entire property from any collection effort based upon a debt incurred or owed by only one spouse.
Even if not technically judgment-proof, a debtor may file for bankruptcy protection. Given the possibility of a full or partial discharge of a debt, any person trying to collect money from another person must consider whether the collection effort will cause the person to declare bankruptcy, whether the money they are claiming from the debtor can be discharged in bankruptcy, and whether they will recover any money through or at the conclusion of the bankruptcy process.
Upon filing a bankruptcy case, the debtor becomes protected from debt collectors under the automatic stay that results from the filing of a bankruptcy petition.
If the debtor has additional debts, a creditor or other person claiming money from the debtor will have its claim considered along with the other debts owed by the debtor's estate. Some debts have priority for payment over others, such that even if a the debtor is not judgment proof, some debtors may receive only part of what is due to them while others may receive nothing at all.
If a debtor files for Chapter 13 bankruptcy, even if the debtor is ordered to repay part or all of a debt, the debt is repaid over a repayment plan that is usually sixty months in duration. If the debtor successfully completes the repayment plan, subject to a few exceptions, the outstanding balance of a debts included in the plan is forgiven.
Creditors and collection agencies do not have to accept or believe a claim by a debtor that the debtor is judgment-proof. However, if a debtor is able to convince the creditor or debt collector that their collection efforts will be fruitless, a creditor may choose to stop debt collection efforts, to write off the debt, or to negotiate a lower payoff amount that, if paid, will satisfy the entire debt.
Collection Prior to Judgment
The amount of evidence that a creditor may require before voluntarily ceasing debt collection efforts is up to the creditor. A creditor may condition any negotiation of the debt or cessation of collection activity upon its receipt of satisfactory proof from the debtor that the claim of being judgment-proof is true. Sometimes a debtor will prefer not to provide personal financial information to a creditor, in which case the creditor is likely to continue with its collection efforts.
Collection After Judgment
Once a creditor has obtained a judgment, the creditor can hold a creditor's examination at which it can compel the debtor to answer questions under oath about the debtor's income, assets and debts. The creditor may use that information to determine what assets, if any, it may reach to satisfy the judgment debt. If no exempt assets or exempt income source is identified, the judgment holder will not be able to use the judicial remedies of garnishment or execution in order to collect money owed.
The concept of being judgment-proof is a description of the practical difficulty in obtaining money from somebody whose assets cannot be reached by creditors.
A person who is owed money or who is pursuing an injury claim against a defendant is not prevented from seeking or obtaining the judgment, merely because the defendant has no reachable assets. The legal impediment is to collection of a judgment, not to getting the judgment in the first place.
Sometimes a person who has a financial or personal injury claim against a debtor may choose to pursue a judgment even if they believe that the debtor is presently judgment-proof.
The plaintiff may believe that the debtor will have sufficient assets in the future to satisfy the judgment. For example, a young defendant may still be in school or have very low income, but over subsequent years may get a good job or start to accumulate assets. Even somebody who has little prospect of earning a future income may experience a windfall, such as an inheritance or lottery victory, and some plaintiffs will seek a judgment based upon even a small chance of future recovery.
The plaintiff may want a judgment against the defendant as a matter of principle, as evidence that the defendant's wrongful or harmful conduct, even though there is no chance of recovery.
The plaintiff may be seeking relief in addition to a money judgment, such as an injunction requiring that the defendant take or refrain from taking specified actions. If the case must be litigated anyway, it makes little difference to obtain a money judgment along with the other relief that the plaintiff is seeking.
Any decision to seek a judgment against a defendant who lacks the means or resources to pay the judgment must be made with full consideration of the cost of obtaining the judgment. Getting a judgment purely for reasons of principle may provide a certain personal satisfaction but, given the cost of litigation and the amount of time it can consume, a plaintiff must be careful not to throw good money after bad.