If you don’t pay your bills for a consumer debt, like for your credit card or cellphone, or fail to make payments for a personal loan or medical bills, the creditor can sue you for the debt they claim you owe. Once the creditor gets a money judgment against you, it can garnish certain kinds of income.
But even if a creditor obtains a money judgment against you, it might not be able to collect on that judgment if you’re “judgment proof.” If your income is protected from garnishment and you don’t have many (or any) assets like a house, personal property, or savings to pay off your debts, you’re probably judgment proof. In most cases, all of the following must apply for you to be judgment proof:
The term “judgment proof” is a bit of a misnomer because the creditor can sue you and get a judgment—it just can’t collect on the judgment.
When a creditor sues you and wins, the court issues a money judgment against you. Once the creditor has a money judgment, it can use various methods to collect on that judgment. It can garnish your wages, place a levy on your bank account, or place a lien against any real estate that you own.
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Generally, you become judgment proof when you:
Often, a judgment creditor will seek to garnish your income to satisfy a money judgment. With garnishment, money is taken out of your paycheck to pay back the judgment. But a judgment creditor can’t take income that you receive from any one or more of the following sources:
Also, 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 federal minimum wage, whichever is less. 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 articles.
Often, a judgment creditor will attempt to levy against your bank account to satisfy a money judgment. The creditor requests that the court issue an order to the bank to freeze the money in your bank account. If any of the exempt 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.
If you don’t own real estate, a judgment creditor won’t be able to place a lien against any real property to satisfy a money judgment. If, though, your financial circumstances should change and you’re able to buy real estate, that judgment can attach to the property at that time. You won’t be able to later sell or refinance your property without the judgment being paid.
A judgment creditor can try to grab your personal property, like your car or jewelry, to satisfy a money judgment. To do so, the judgment creditor must first get a writ of execution from the court that identifies the property it intends to take. If a creditor has obtained a judgment against you and seeks to enforce it by taking your cash, or by seizing and selling other property, you most likely can keep at least some of that property by using exemptions.
Often, a judgment creditor won't 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.
Even if you’re judgment proof, you usually shouldn’t ignore your creditors and debts. Being judgment proof is, in some cases, only a temporary condition. Your financial situation could improve; you might resume working or could inherit some property.
If a creditor sues you and you believe that you’re judgment proof, it’s often a good idea to respond to the lawsuit anyway. You might have a valid defense to the suit, like the statute of limitations has expired. Also, judgments are valid for a very long time and can be renewed. If your financial circumstances might improve in the future, the creditor could be able to collect at that time.
In some circumstances, though, you might 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 attorneys’ fees and court filing fees to answer the suit. Before you determine this is the best route, however, talk to an attorney.