If you do not pay your bills as agreed, your creditors can sue you for the debt that they claim you owe. If a creditor obtains a money judgment against you, it may not be able to collect on that money judgment if you are “judgment proof.” Read on to learn more about what it means to be judgment proof.
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What Does it Mean to be Judgment Proof?
When a creditor sues you and gets a money judgment against you, it has a variety of methods it can use to collect on that money judgment. A creditor can garnish your wages, place a levy on your bank account, and/or place a lien against any real estate that you own.
However, if you don’t have any income or property that the creditor can legally go after, then you are what is often referred to as judgment proof. The term is a bit of a misnomer, because the creditor can sue you and get a judgment -- it just cannot collect on the judgment.
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When Are You Judgment Proof?
Generally, you are judgment proof if you:
- do not own any assets such money in a bank account or real estate
- are not working or have a very low-paying job, and
- any other source of income is exempt from seizure by judgment creditors. Examples include unemployment benefits, social security, and other public entitlement benefits.
All of Your Income Is Exempt
Often, a judgment creditor will seek to garnish your income to satisfy a money judgment. This means that money is taken out of your paycheck to pay back the judgment. However, a judgment creditor cannot attempt to take income that you receive from any one or more of the following sources:
- Social Security benefits
- Supplemental Security Income benefits
- public assistance benefits
- unemployment benefits
- veteran’s benefits
- child support, and
- federal employee and civil service retirement benefits.
In addition, federal law limits the amount that a judgment creditor can take from your paycheck. The amount that can be garnished is limited to 25% of your disposable earnings (what's left after mandatory deductions) or the amount by which your wages exceed 30 times the minimum wage, whichever is lower. Some states set a lower percentage limit for how much of your wages can be garnished. (To learn more about how wage garnishment works, and the limits in your state, see our Wage Garnishment topic page.)
You Don’t Have Money in a Bank Account
Often, a judgment creditor will attempt to levy against your bank account to satisfy a money judgment. The creditor does this by requesting that the court issue an order to the bank to freeze the money in your bank account. If any of the income noted above is in your bank account and those funds are levied, the judgment creditor and the court who issued the levy, must release those funds back to you.
For further details about how a bank levy works, see Frozen Bank Accounts and Bank Levies.
You Don’t Have Equity in Real Estate
If you do not own real estate, a judgment creditor will not be able to secure a lien against it in order to satisfy a money judgment. If, however, your financial circumstances should change and you are able to purchase real estate, that judgment can attach to the property at that time and you will not be able to later sell or refinance your property, without the judgment being paid.
You Don’t Have Nonexempt Property
A judgment creditor can try to grab your personal property, such as your car or jewelry, to satisfy a money judgment. In order to do so, the judgment creditor must first get a writ of execution from the court that identifies the property it intends to take. It can only take the property if the equity in the property is exempt. (To learn what this means, see our area on Property Exemptions.)
Often, a judgment creditor will not attempt to levy your personal property because of the time and expense incurred in locating the property and the added expense of advertising and selling the property.
Being Judgment Proof Is Not Always Permanent
If you are judgment proof, this does not necessarily mean that you should ignore your creditors and debts. Being judgment proof is, in some cases, only a temporary condition and your financial situation could improve. For example, you could resume working or inherit some property.
If a creditor does sue you and you believe that you are judgment proof, in many cases it is a good idea to respond to the lawsuit. Judgments are valid for a very long time and can be renewed. If it is possible that your financial circumstances may improve in the future, the creditor may be able to collect at that time. (To learn about creditor lawsuits and how to respond, see our Creditor Lawsuits area.)
In some circumstances, however, you may not want to respond to the lawsuit. If you agree that you owe the amount claimed in the lawsuit (including interest and fees) and your financial situation won’t change, it might make sense to let the creditor get a default judgment instead of paying attorney’s fees and court filing fees. Before you determine this, however, talk to an attorney.