What Does Judgment Proof Mean?

If you don't pay your bills for a consumer debt, like for your credit card or cell phone, 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, levy assets, or place a lien against real estate you own.

Even if a creditor gets a money judgment against you, it might not be able to collect on that judgment if you're "judgment proof." You might be judgment proof if you don't have a job and have no future prospects of finding employment, live on government benefits, have few assets, and the money in your bank accounts comes directly from exempt (protected) funds. (State and federal laws protect consumers by limiting how much creditors can garnish from your wages or bank account and how much of your property can be seized. These protected funds and assets are called "exempt.")

So, 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.

What "Judgment Proof" Really Means

The term "judgment proof" isn't a legal term. In fact, it's a bit of a misnomer because the creditor can sue you and get a judgment. But the creditor can't collect on the judgment. So, you can still have a judgment of record against you, but the creditor can't collect on it.

However, most creditors won't bother to sue if they know that you're judgment proof. Instead, a creditor will usually sue another defendant who has assets, income, or property they can garnish, levy, or lien. So, if a creditor is trying you collect from you, but you're judgment proof, notifying that creditor about your judgment-proof status could prevent a lawsuit.

How Creditors Get Judgments

A creditor can get a judgment in two ways after filing a lawsuit against a debtor. First, the creditor can get a judgment after the court decides in favor of the creditor after the debtor responds to the suit by filing an answer. In this situation, the court then enters a judgment for the creditor.

Another way a creditor can get a judgment is by filing a lawsuit, but the debtor ignores the suit. The court will then enter a default judgment (basically, an automatic win for the creditor) against the debtor.

Again, after a creditor sues you and wins, the court issues a money judgment. A "judgment" is a court order that says the defendant must repay the debt owed. Once the creditor has a money judgment, it can use various methods to collect that judgment. It can garnish your wages, place a levy on your bank account, or place a lien against any real estate you own.

However, once you're judgment proof, the creditor can't collect on a judgment by taking your assets or property—unless you voluntarily agree to give it to them.

How Do I Know If I Am Judgment Proof?

You might be safe from one kind of judgment collection but susceptible to another. In this situation, you would not be judgment proof.

For example, say a creditor can't garnish your income because it's exempt under the law, but you own a home with a lot of equity. (You can determine your "equity" in a property by subtracting the amount of unpaid debts secured by the property from the home's fair market value.) The judgment creditor can probably put a lien on your home. So, you won't be able to sell the property without paying the creditor out of the proceeds. Or, say you don't have a job but have money in your bank account. The creditor can go after those funds so long as the money isn't exempt. In these situations, you aren't judgment proof.

A person is judgment proof when all their income and property are exempt from creditors' claims under the law. A debtor who has no savings or assets and no job (or a low-paying job) can also be considered judgment proof. (Basically, you have nothing the creditors can legally take from you even after winning a lawsuit.)

In most cases, all of the following must apply for you to be judgment proof:

• your debt is all unsecured
• your income can't be garnished
• all of your property is protected by exemptions (you don't own anything with a lot of value, like a house or vehicle with equity, or household items), and
• your situation is unlikely to change.

For example, say you're permanently disabled, unable to work, and don't have a lot of belongings. Your assets are exempt from collection under state law, and you're on Social Security disability payments (SSDI). Because creditors may not garnish these payments and you have no other source of income or assets, you're likely judgment proof.

Factors of Being Judgment Proof

To recap, generally, you become judgment proof when you:

• aren't working or have a very low-paying job, or your only source of income is government benefits
• don't own many or any assets such as money in a bank account, investments, or equity in real estate
• any other income source, like unemployment benefits, Social Security, and other public entitlement benefits, as well as personal property, is exempt from seizure by judgment creditors,
• have a limited amount of belongings (each state and the federal government lists commonly-owned items that are exempt from collection up to a specific dollar amount).

You Don't Have Money in a Bank Account

A judgment creditor will often 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 account.

If any of the exempt income noted below 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.

You Don't Have Equity in Real Estate

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. However, if 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 sell or refinance your property later without the judgment being paid.

You Don't Have Nonexempt Property

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.

What Type of Debt Does Judgment-Proof Status Apply To?

Generally, the term "judgment proof" is used in conjunction with consumer debt, such as:

• credit card debt
• personal and bank loans, and
• other consumer debts.

However, different rules apply to debts you owe the government or for child or spousal support.

What Kinds of Income Are Exempt From Garnishment?

Often, a judgment creditor will seek to garnish your income to satisfy a money judgment. With garnishment, money is taken from 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:

• 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.

Also, federal law limits the amount 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.

Are Senior Citizens Judgment Proof?

Certain types of income that senior citizens receive, such as Social Security, are typically exempt from garnishment. Usually, Social Security and ongoing Social Security Disability Insurance (SSDI) payments directly deposited in a bank account are exempt from creditors. So, those creditors can't get that money.

However, for SSDI, this general rule has a few exceptions. For example, the federal government can garnish disability income to recover defaulted federal student loan payments (loans the federal government guarantees) or overdue taxes. Also, SSDI income can be garnished to recover child support obligations, alimony, or restitution to a crime victim. Again, though, SSDI payments are usually exempt.

Social Security and Supplemental Security Income (SSI) benefits are exempt from collection efforts.

Can Judgment-Proof Status Change? (Can I Be Judgment Proof Permanently?)

Being judgment proof is, in some cases, only a temporary condition. Judgments last a long time, typically several years, and usually can be renewed. Creditors can try to collect on a judgment long after winning a lawsuit against a debtor. If your income increases or your financial status improves, like if you get an inheritance, your judgment-proof status can change. So, even if you're judgment proof, you usually shouldn't ignore your creditors and debts.

If a creditor sues you and you believe you're judgment proof, it's usually 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.

But in some circumstances, 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. However, talk to an attorney before determining this is the best route.

What Happens When You Are No Longer Judgment Proof?

You'll remain judgment proof for as long as your financial condition stays the same or gets worse. However, if your finances improve, you're no longer judgment proof. Your creditors might then try to collect on judgments.

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Getting More Information

For a comprehensive guide on dealing with financial problems, including how to prioritize debts, budget your money, negotiate with creditors, avoid foreclosure, and more, get Solve Your Money Troubles: Strategies to Get Out of Debt and Stay That Way, by Amy Loftsgordon and Cara O'Neill (Nolo).