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Posted by: Rob Cohen
We all know why people are considering filing for bankruptcy.
We have seen an unprecedented “black swan” type event in the coronavirus. Unemployment numbers are way up and many Americans face an uncertain financial future.
Under these circumstances, bankruptcy is a natural consideration. Those thinking of filing bankruptcy, or even families facing mounting credit card debt, may have heard the term “judgment proof” thrown around.
But, what does it mean?
Debtors are considered judgment proof when there is nothing creditors can take from them, since all of their property is exempt under state law. Creditors use judgments (a court’s determination that you owe a debt) to enforce past-due debts, but if you don’t own much, a judgment won’t help a creditor, since they can only come after non-exempt assets.
When you are judgment proof, filing for bankruptcy may not always be necessary.
Read on to find out more.
Bankruptcy and How to Determine If You are Judgment Proof
So, is bankruptcy the right solution for you? Unfortunately, there is not always a clear-cut answer.
Do you have assets to protect?
Perhaps you’ve made significant payments on your mortgage loan or perhaps you own one or more cars. If you’re trying to protect important assets, bankruptcy may be able to help.
When you file for bankruptcy, the automatic stay kicks in to protect you from creditors. The automatic stay forces all collection actions to a halt, including foreclosure, repossession, and collection actions. It lasts through the bankruptcy process and can give you the time and space you need to reorganize your finances and get back on track.
In addition to the automatic stay, Chapter 7 bankruptcy can protect your property through state or federal exemptions. Exempt property is off-limits to creditors. For instance, income from Social Security is exempt from creditors. Most states also have a homestead exemption and a car exemption, which protect your equity in those assets. If you qualify, creditors won’t be able to take your car or your home through the bankruptcy process.
Other common exemptions include household goods, clothing, and work-related tools. Most Chapter 7 debtors surrender little or no property in bankruptcy and walk away with a discharge of all their unsecured debts. Chapter 13 bankruptcy allows you to work with the court and your creditors to agree on a 3- to 5-year payment plan. Your assets will be safe and you’ll make affordable payments toward your debts over time. At the end of the plan, your remaining unsecured debts will be forgiven. You’ll still be liable for any remaining secured debt, such as a mortgage or auto loan, but you’ll be free of the burden of unsecured debt and it will be easier for you to make those payments.
When is bankruptcy the wrong choice?
Bankruptcy is designed to protect a debtor’s important assets and use any nonessential assets or income to pay off creditors. If you don’t have any assets or income that a creditor can claim, you may be better off simply doing nothing.
When you default on a debt, your creditor will first attempt to contact you and convince you to pay the debt. You’ll get plenty of phone calls and letters. If you don’t respond, your creditors may choose to take you to court. They can get a judgment against you for the amount of the debt and a court order to foreclose on or repossess your property, levy your bank accounts, garnish your wages, or seize and sell your property.
With a judgment against you, a home, car, jewelry, bank account, and any other valuable assets may be up for grabs by creditors. If you don’t have any valuable property and you’re not earning any income, you may be “judgment proof.” A judgment proof debtor is safe from a court judgment for collection. The court can only issue an order for collection of property that you own or income that you earn. If you don’t own anything worth repossessing, foreclosing on, seizing, or levying and you don’t earn regular income, a judgment against you is worthless.
In some cases, you may be able to keep assets such as a car or jewelry because they aren’t worth enough for creditors to try to collect them. Creditors generally know ahead of time if you are judgment proof and may choose not to bother with filing a lawsuit. Filing suit costs them money and they can’t get anything out of you anyway. However, they may continue to call and send letters attempting to collect.
You don’t have to be totally destitute to be judgment proof. Certain types of income, such as Social Security benefits, unemployment benefits, some types of retirement income, and disability benefits, are safe from collection lawsuits under any circumstances. Federal law also limits the amount of any regular wages a creditor may garnish, so you are generally safe from garnishment if you earn $217.50 per week or less (30 times the federal minimum wage).
Being Judgment Proof May Not Last
Debt collection is subject to a statute of limitations. The law varies by state, but creditors generally can’t sue to collect after a few years. So, when they near the end of the statute of limitations on your debt, they may choose to sue just to get a judgment and keep the collection option open.
Before you decide to ignore collection calls or a collection lawsuit, consider that a judgment for collection is valid for 10 years. Creditors also can seek renewal of the judgment, meaning you may be on the hook for a long time. If you come into money or start earning a paycheck with a judgment against you, the creditor can seize the cash or garnish your wages.
If that happens, you may need to turn to bankruptcy to protect your newly-acquired assets.
How do I decide what to do?
If you’re struggling with debt and considering bankruptcy or if you’ve been sued for collection, reach out to an experienced local bankruptcy attorney. Most of them offer free consultations, so you’ll have the chance to explain your circumstances and they’ll help you decide on the best course of action in light of your circumstances and goals.
Perhaps your best option is to seek alternative debt relief, such as debt consolidation or debt settlement. If you’ve been sued for collection, your attorney will help you determine if you should answer or ignore the lawsuit. Even if you’re judgment proof, you may want to answer the suit if you believe you don’t owe the debt or you owe less than the lawsuit claims. You don’t want to risk getting a new job or inheriting some money in a few years and having it seized to pay a debt you didn’t even owe! Maybe you’re permanently judgment proof and the lawsuit is correct, in which case you may be best served by not answering the suit at all. In any case, you should never ignore a lawsuit without consulting with an attorney.
Perhaps bankruptcy is the best course of action for you — it will stop a collection lawsuit and protect your important assets while permanently wiping out your unsecured debts. Even when your debt seems insurmountable and lawsuits are pending, you have options. Get a free consultation with an experienced attorney so you can deal with your debt the right way.
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Rob Cohen, the Managing Partner of Cohen & Cohen P.C., is a bankruptcy attorney that practices in Colorado and Wyoming. He serves as a Chapter 7 Bankruptcy Panel Trustee, and has to date administered over 8,000 Chapter 7 bankruptcy estates. Rob is a Certified Consumer Bankruptcy Specialist, and was nominated for Denver Business Journal’s 40 under 40 in both 2014 and 2016.