Understanding Judgment-Proof: What It Means for Debtors

You may have heard at some point that someone used the term that they are judgment-proof from creditors, but what does that mean?

It sounds like a judgment can’t be issued against that person, but that is untrue. Being judgment-proof means that if there is a monetary judgment against you, the judgment creditor has no way of collecting. But let me elaborate on this issue and discuss how to protect yourself in case of a lawsuit.

Key Points:

• Judgment proof debtors have no assets for creditors to collect a money judgment from.
• Some forms of income cannot be attacked by creditors.
• Avoid a default judgment to protect your rights.

What are the Steps in a Lawsuit?

Every lawsuit has two phases to it. The first phase is when the petitioner or the plaintiff, the party filing the lawsuit, files a petition or complaint with the clerk’s office. Once a case number is assigned, you are notified of the lawsuit because you will be “served” the documents. This is known as service of process, and it is typically done by a private process server licensed in your state or the local Sheriff’s Office.

Depending on your state’s laws, you must file a response to the lawsuit within twenty to thirty days. The number of days would be listed in the summons which is part of the documents you will receive when you are served. Note that it is calendar days, not work days.

At that point, your case takes the regular process through the court system, and if there isn’t a settlement agreement, then there will be a trial before the judge.

What Happens if a Response is not Filed to the Lawsuit?

It is never good to ignore a lawsuit. Unfortunately, that does happen, and when it does, the court will grant whatever the petitioner or plaintiff listed in the complaint. This is known as a default judgment.

Whether there was a trial or a default judgment, the second phase of the lawsuit begins.

Collecting on the Money Judgment

Once the court enters a final judgment, the plaintiff has the right to take steps to collect on that money judgment. This could be through a wage garnishment; depending on your state’s laws, the garnishment could range between 15 to 25% out of your paycheck. Your employer will deduct the amount and send the payment directly to the judgment creditor.

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The creditor also has other options besides garnishing your wages, such as placing liens on your assets, whether your car or home. A judgment creditor could also get a court order to freeze your bank accounts.

What Happens if You Are Judgment Proof?

If you are judgment proof, the plaintiff cannot collect on the money judgment. This means there are no assets such as a car or a car with minimal value or no home. Bank accounts would also have minimal balances.

A person who is judgment-proof will also likely not have wages that can be garnished, and other sources of income could be protected, such as Social Security income.

However, being judgment-proof does not mean the judgment creditor cannot sue you. It just means that there is no way to collect that money judgment if they sue you. If something changes financially in the future, then the creditor can seek to collect at that time.

It is also essential to know that certain wages or benefits are protected from creditors. This includes Social Security benefits and SSI  (Supplemental Social Security Income).

Other benefits such as public assistance, veteran, and unemployment benefits are also protected.

How to Protect Yourself if You Are Judgment-Proof

If you have protected wages, such as Social Security income, that money cannot be mixed with someone else’s bank account, such as a spouse. The reason is that the judgment creditor would only know that there is a bank account attached to you, and when they freeze the account, they will be freezing all the funds in that account.

At this point, while a hearing could be scheduled on this issue to prove that the funds frozen were not yours, it can create unnecessary complications. For example, if the account was frozen just before your spouse or family member was going to pay the rent, by the time a court hearing is scheduled, the rent is past due, and eviction proceedings can now be pending.

Avoid the Pitfalls of Balance Transfers

Therefore, keeping protected income in a separate bank account is essential. That way, if a judgment creditor seeks to freeze the bank account, the bank can easily confirm that the deposits are protected. The bank will reject the creditor’s request despite a court order.

However, the bank will not determine the protected amount once the Social Security income or other protected benefits are mixed with additional funds.

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Please note the information on this site does not constitute legal advice and should be considered for informational purposes only.