What does being judgment proof mean and do I need to file bankruptcy if I am?
These are frequent questions I get asked.
What is a Judgment?
A judgment is a court order that fixes an amount owed on a debt (known as “liquidating” the debt) and which gives the party who obtained the judgment the legal right to take action to collect on the judgment against the judgment debtor (the party who OWES the money).
Such actions are limited by the laws of each State as well as federal law, but commonly include the following:
- garnishing wages of the judgment debtor (in California, up to 25% of the debtor’s net wages can be taken)
- seizing bank accounts
- placing liens against real estate and other property
What is Being Judgment-Proof?
You are judgment-proof if there is nothing the creditor who obtained the judgment can get from you.
For example, if you are unemployed and have no income, or your only income is from a protected source such as Social Security, then despite having a judgment, the creditor holding the judgment cannot garnish your wages. They also can’t take money from your bank account if you can prove the money in there is all from Social Security or other protected source.
Each state has exemptions which protect the value of certain assets.
If you have very little assets and no real estate, then it won’t do the creditor any good to get a lien against your assets. Real estate is one of the few assets that potentially increases in value. Getting a lien against other assets, like a car which is presently exempt in value, won’t do the creditor any good, because the value is only going to decrease over time.
Should You File Bankruptcy?
The answer to this really depends on where you are in your life.
Someone who is 90 years old, retired, with no non-exempt assets and social security income probably does not need to file a bankruptcy case, although doing so can protect any gifts they are giving through their will or trusts from creditor claims. Also, it can stop creditor harassment.
For others, however, here are a couple of other reasons to file bankruptcy even if you are judgment-proof:
- Unless you want to spend the rest of your life without assets or a job, you’re not going to be judgment-proof forever
- Bankruptcy allows the great ability to start over and rebuild your credit far more quickly and effectively than not filing bankruptcy
In California at least, judgments are valid for ten (10) years, and are renewable.
Thus, if you eventually get a job, your creditors can start garnishing your wages once you start working.
If you put money in a bank account, they can get an order allowing them to take that money. If you purchase a house (see more below), their judgment lien will automatically attach to it (assuming it was properly recorded).
The timing of when you file bankruptcy becomes rather critical.
File Bankruptcy Before Acquiring Assets
If a creditor gets a judgment and records that judgment with the county recorder in an area where you later purchase real estate, that lien will automatically attach to the property. In other words, just because you are judgment-proof when the judgment is entered, doesn’t prevent the creditor from attaching your assets when you get them. Unless, of course, you file bankruptcy and discharge the debt BEFORE you get property the creditor can attach.
This may seem like a simple concept, but I have had too many clients over the years who have judgments against them, that turned into liens against their homes (some of them were unaware the liens had even been recorded) before they decided to look into filing a bankruptcy case.
So the time to look into bankruptcy is when a lawsuit is filed against you (before they get a judgment). If you have no assets and are judgment-proof, a competent bankruptcy attorney will advise that you can wait a while to file bankruptcy. But if you already have assets that can be attached by the creditor, you’re going to most likely want to file bankruptcy sooner, rather than later.
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