Judgment Proof - What Does it Mean?

Facing financial hardship can be overwhelming, but if you do not have much in the way of assets or income, you could be 'judgment proof.' This guide is here to help you navigate this protective financial status, and provide you with advice on how to handle creditor lawsuits with assurance. Take a moment to relax, and discover how this knowledge can help you when it comes to your finances.

What Does Judgment Proof Mean?

Let us start with what judgment proof is not. It is not a finding by a judge or a test a person passes or fails. You cannot declare yourself judgment proof, or prove it in court. Judgment proof is a phrase used to describe your present financial condition. You can be judgment proof today, and then tomorrow win the lottery or inherit money or assets that make you wealthy and no longer judgment proof. Because it is possible for your financial situation to change, judgment-proof is not considered a permanent condition. It is up to your creditor to decide if you’re judgment proof.

Creditors usually consider you judgment proof when:

1. You do not work or if you work your take-home pay is low, and
2. You have no equity in expensive assets, such as real estate, rare artwork, luxury cars, boats, and
3. Your other sources of income (if any) are exempt from garnishment

Exempt sources of income include Social Security, VA, and unemployment benefits, private pensions, personal injury payments, and child support. Each state has its own list of other income exemptions that may apply to you. See the Bills.com Collection Laws & Exemptions page to learn some of the exemptions for each state.

Sending a judgement proof letter

You can send creditors a judgment proof letter (PDF), but creditors are free to ignore such a letter and continue to pursue you aggressively. Your declaring yourself judgment proof will not stop a lawsuit make a collection agent stop calling you.

How Can Creditors Collect From Me?

If the original creditor or collection agent cannot get satisfaction in collecting from you using telephone calls or letters, it will resort to your state court system and file a lawsuit against you. If you receive notice of a lawsuit, consult with a lawyer to file an answer to the creditor’s complaint. You want to file an answer because many creditors know they do not have enough evidence to convince a judge the consumer owes the debt, and rely on the consumer not putting up a fight. If a consumer does not answer a complaint, the creditor wins by default. Therefore, many consumers find that when they oppose the lawsuit the creditor gives up and asks the court to dismiss the case.

When a creditor wins a lawsuit against the consumer, the court will award the creditor a judgment. The judgment gives the creditor the right to garnish your wages (in most states), levy your bank accounts, place a lien on your property, and demand the sheriff seize and auction your non-exempt personal property. See the Bills.com resource Collections Advice to learn more about what lawyers calls remedies.

Quick tip - Check out your state's SOL: A judgment lasts for many years, and if left unresolved, will harm your ability to obtain a future loan. See this list of statutes of limits for judgments for each state.

What Should I Do If I Am Sued?

As mentioned, file an answer to the lawsuit. If you’re a quick study and can express yourself in written word clearly, you can respond to the lawsuit yourself. Your best bet, however, is to consult with a lawyer who has consumer law experience. He or she can write the answer using the language and legal arguments your state court will expect. If you can't afford a lawyer, call your county bar association and ask for the names of the organizations that provide no-cost legal services to people with low or no income in your area.

What if I am not judgment proof?

If you are not judgment proof, you must find a way to resolve the debt. Your options include:

1. Negotiate a settlement

A settlement is a deal you negotiate with your creditors to either establish a new payment schedule at a reduced interest rate, or a lump sum payment that’s significantly lower than the present balance. If your only other option is bankruptcy, your creditors may be willing to negotiate with you to ensure that they get something rather than nothing. See the Bills.com article Debt Settlement Advice to learn more about this option and tips on how to negotiate with creditors.

2. File bankruptcy

Bankruptcy can wipe out your debts and give you a fresh financial start. Bankruptcy can be hard on your credit score, and make it impossible to qualify for a home loan for several years after a discharge. See the Bills.com article Bankruptcy Questions & Answers to learn more about this option.

3. Find a loan

A debt consolidation loan may help you manage your monthly cash flow. Study What is the Best Kind of Debt Consolidation Loan? to understand your loan-related options and the costs of each.

Bills Action Plan - Steps to take if you are not judgment proof

Judgment proof describes your present financial state. It is not a legal description. If you face a lawsuit and believe a judgment-creditor cannot collect a money judgment from you, take these four steps:

1. Learn your state’s exemptions for:
   • Wage garnishment
   • Account levy
   • Liens
   • Seizing personal property
2. Consult with a lawyer to learn if you are judgment proof today
3. Answer the lawsuit even if you are judgment proof
4. Know your debt resolution options so you can avoid a judgment