Judgment Proof, Smudgment Proof; What Does it Mean to be Judgment Proof?
Judgment proof means that if a creditor sues you and gets a judgment against you, none of the actions the creditor could take to collect the debt—wage garnishment, seizure of assets, etc.—would work. Judgment proof is actually a misnomer, the idea of being judgment proof means that you are “collection proof.” Being collection proof means you have very little income (or exempt income such as social security) such that the court will not allow wage garnishment, don’t own a home, don’t have any financial accounts, and don’t own a car or your car is worth so little that it falls within your states exemption.
So, I will often get the question; “if my creditors can’t do anything to me, why should I file bankruptcy?”
First, being collection proof is not a “solution” to your debt because being collection proof doesn’t resolve the debt. Second, the idea of being collection proof doesn’t stop collection activity. Thus, the debtor needs to realize that being collection proof is, hopefully, temporary; meaning, does the person really want to stay at a low paying job and never own a home just to avoid paying his creditors? Are you really willing to drop of the grid, so to speak? Also, there are lifestyle issues to consider; just because you may be collection proof for now, collection activity doesn’t stop—phone calls, phone calls to family, letters, bank account garnishments, etc. Most people are not in a position to become “professional debtors;” and really, who wants that stress? Even if the creditor cannot garnish your wages directly, they can garnish your bank account and the burden is on YOU to go back to court and exercise your exemption. Being and maintaining collection proof status is actually a lot of work and hassle. People are usually far better off filing bankruptcy and brining certainty to the status of the debt.
For any collection proof person that is pre-retirement, I recommend bankruptcy because being collection proof is usually temporary, but judgments essentially last forever. For those in retirement, I recommend bankruptcy because the debtor probably does not want to spend his golden years dealing with collection activity. However, that doesn’t mean I won’t use collection proof as a tool; for example, I won’t file a chapter 7 bankruptcy for a client who is unemployed. As odd as that may sound, the reason is I want the client to be financially successful and not get back into debt; so for chapter 7 cases I require clients to demonstrate that they have at least enough income coming in to pay their living expenses. The client can look for a job and there is little risk in the interim before being in a position to have a successful chapter 7 bankruptcy. [Judgment proof often raises a question about the Statute of Limitations, which I will address in a future post]
April 7th, 2009 at 5:40 pm
[...] of the questionable practices of collection law firms, collectors can very easily get a default judgment against you, possibly get a wage garnishment, and put the burden on you to reopen the case and [...]