Judgment Proof

Americans’ credit card debt is approaching a record $1 trillion,  delinquencies on auto payments are escalating, and steadily climbing interest rates only make matters worse for consumers struggling with credit card debt.

Falling behind on these payments invariably leads to creditors seeking help from the court — filing lawsuits that result in judgments, whereby the collectors can seize your cash or property.

Amid such a dire financial situation, there is some relief: Federal and state laws that protect the small incomes and modest bank accounts for people who are deemed “judgment proof.” This status puts creditors on hold and renders judgments worthless against people who are broke or lack assets that can be seized.

On this page, we’ll evaluate whether you qualify for judgment-proof status, and if you do, there’s advice regarding how you can prove that to creditors. We’ll also dig into which income streams are exempt from garnishment — meaning debt collectors can’t touch them — and we’ll explain why judgment-proof status usually is only temporary.

After absorbing this information, you should consult with a nonprofit credit counselor for advice on how to reset your financial situation.

What Does “Judgment Proof” Mean?

When you are deemed judgment proof — also known as “collection proof” — it means that you lack income and assets to pay off a debt. It typically applies to people who are unemployed or working at a low-wage job, and those who lack savings or real estate that can be seized.

While being judgment proof shields you from creditors attempting to recoup delinquent funds, it’s a temporary status and doesn’t erase or minimize the debt you owe. Court-ordered judgments are binding for many years and can be renewed. You should not assume the debt goes away, because you may cease to be judgment proof once you resume working, land a higher-paying job or receive an inheritance.

What Is a Judgment?

A judgment is a court ruling issued after a creditor or debt collector successfully sues for unpaid accounts, such as credit cards, cell phones, or medical bills. The judgment is issued after you may have failed to reply to a court summons by the specified date, or you may have ignored the lawsuit entirely because you were unable to pay.

The judgment affirms that the debt collector may garnish your wages or assets, which could include placing a lien on any real estate you own. After a judgment, the balance on your debt also can worsen to include attorney fees and interest.

Am I Judgment Proof?

You become judgment proof when your current situation renders you too poor to pay. Your circumstances can include:

• Being unemployed or working a low-paying job that barely earns enough for you to afford food and rent
• Receiving other types of income that are legally exempt from garnishment
• Possessing little to no money in bank accounts, CDs or stocks
• Having no assets that can be seized such as a home, land, automobiles, jewelry, or other personal property.

Types of Income Exempt from Garnishment

A court judgment can lead to the garnishment of wages, requiring your employer to send a portion of your earnings directly to the debt collector. However, collectors can garnish only 25% of your take-home pay, according to federal law.

For instance, let’s imagine you earn $1,000 per week and take home $800 after mandatory deductions for federal, state and local taxes and FICA. That means no more than $200 per paycheck will be exposed to garnishment. And that $200 goes for all creditors seeking payment. So even if you face multiple collectors with wage-garnering judgments, they all must take their piece from that $200.

Again, that 25% maximum is the federal limit. In addition, 38 states further restrict the amount that debt collectors can take from your wages. And four states — North Carolina, South Carolina, Pennsylvania and Texas — prohibit all garnishment of wages to satisfy a consumer debt.

Regardless of what state you reside in, certain other types of income are completely protected from garnishment:

• Social Security benefits
• Money received from child support and alimony
• Supplemental Security Income benefits
• Unemployment benefits
• Veteran’s benefits
• Federal employee and civil service retirement benefits
• Public assistance benefits, such as food stamps, SNAP and WIC

Bank Accounts

After obtaining a court judgment, a collector can place a bank levy on your accounts. This is a harsh action that freezes the account, with only the creditor allowed to withdraw money in an attempt to pay off the debt.

To enact a levy, the creditor must notify your bank with proof of the judgment. With the account frozen, you won’t regain access to the money until your debt is paid off.

In some instances, the levy can wipe out all the money in an account. However, funds you have from those exempted sources we mentioned previously — Social Security benefits, unemployment payments, child support, etc. — are protected from the creditor. The bank is required to review the account for

protected funds, totaling up these deposits for the previous two months, which is called a look-back period. The sum of those exempted deposits cannot be claimed by the creditor. So, if your account currently contains $4,000 and you received $3,000 in Social Security direct deposits during the two-month look-back window, only $1,000 would be vulnerable to the levy.

If you are faced with a bank levy, it’s important that you stop using the account. That means halting direct deposits and opening a new bank account in order to handle any automated bill-pay withdrawals that were coming from the levied account.

Property

Armed with a judgment, debt collectors can impact your real estate by attaching a lien to your home. This becomes an obstacle if you attempt to sell your home, as liens typically must be paid off before the transaction becomes final.

Your primary home is exempt, meaning a creditor can’t seize your house and dump you onto the street to satisfy a consumer debt. However, the collector can seize and sell non-exempt properties, such as:

• Second homes and second motor vehicles
• Property you own but don’t have on hand. This can include vacation timeshares or an auto that someone else is driving.
• Property you’ve recently given away. Attempting to skirt foreclosure by transferring property to a friend or family member won’t solve the problem — it potentially can get you and the recipient sued for fraud. The same risks are associated if you sell it to them at a price that’s below market value.
• Property you’re entitled to but don’t yet possess. These include inheritances, trust-fund payments, royalties and insurance payouts.
• Property that’s only partially exempt. This involves property where the value exceeds the amount protected by an exemption. A debt collector can seize and sell but must pay you the value of the exempted portion.

How Do You Prove You Are Judgment Proof?

Alerting collection agencies that you are judgment proof — in order to stop their frequent calls — can be accomplished by hiring a reasonably priced lawyer. You may produce a “Cease Communications” letter yourself, considering there are templated forms available.

Consumers are protected by the Fair Debt Collection Practices Act, a federal law that prohibits debt collectors from using unfair, deceptive or abusive practices in an attempt to collect money.

The fact that you are judgment proof should be enough to dissuade debt collectors from harassing you, but if not, hiring a lawyer should put an end to the problem.

If you want to try and handle it yourself, use the format in this sample below of a collection proof letter and that should do the job.

Many seniors in debt are judgment proof because, as retirees, they draw fixed incomes from Social Security and other exempt sources that can’t be garnished.

When to Send a Judgment Proof Letter

Debt collectors can be notoriously aggressive, so it’s important to know your debt collection rights and how federal law tries to rein in their harassing tendencies. The collectors can only reach you between the hours of 8 a.m. and 9 p.m. and they are prohibited from contacting you at work, provided you tell them your employer disapproves. They also are restricted from threatening you with arrest, using profane language or violating your privacy by revealing your debt to other people.

One option to stop the harassment? Sending a judgment proof letter to the collectors. Your letter should contain:

• An explanation why you are judgment proof. (For instance, you can point out that you live off a judgment proof pension and Social Security.)
• Your full legal name and address
• Your account number
• Statement that you are exercising your rights according to the FDCPA
• The correct correspondence address for the debt collector, which is usually different from the make-a-payment address.

Exemptions to Judgment Proof Status

Being judgment proof can shield you from consumer debt collectors. However, it doesn’t absolve you from falling behind on child support, alimony and student loan payments. All of those must be paid regardless, and the government can garnish income from Social Security and Social Security Disability Insurance or tax refunds until those payments are made whole.

What Happens When You’re No Longer Judgment Proof?

Seniors living on fixed incomes and people with disabilities are likely to remain judgment proof permanently. For others, the status could evaporate with a job change, an inheritance or the sale of a home. Creditors who previously had been unable to collect suddenly will have grounds to pursue a payoff once your financial situation improves.

If you owe money and are being hounded by one or multiple debt collectors, it’s likely time to take advantage of free credit counseling. Reaching out to a nonprofit credit counseling agency like InCharge Debt Solutions won’t cost you anything and can provide tools to get your finances in order. In a phone call that typically lasts 30-40 minutes, the counselor will discuss your budget and help access your credit report. They won’t judge or shame you, but rather, they’ll review debt relief options to determine which is best for your situation. These include:

• Debt management plan
• Debt consolidation
• Debt settlement
• Credit card debt forgiveness
• Bankruptcy