Judgment Proof

What Is Judgment Proof?

Judgment proof is a description of a person who does not have enough assets for a creditor to seize when a court order requires debt repayment. A debtor who is broke and unemployed can be considered judgment proof, as can a debtor who only has certain legally protected types of assets or income.

Being judgment proof, also called “collection proof,” is not permanent. Judgments can be valid for many years, and creditors can continue to try to collect what the judgment allows long after they win a lawsuit against a delinquent borrower.

Understanding Judgment Proof

In general, two criteria are used to identify a person as judgment proof. The first one is the absence of proper income. An individual who is unemployed or working a low-paying job that pays minimum wage and earns enough to barely survive may fit into this category.

The second is the absence of assets, such as bank accounts or real estate that can be used as collateral by creditors. Income earned from the government, including social security, unemployment benefits, and disability, is exempt from collection by creditor agencies.

When a person is deemed judgment proof, creditors are unable to collect any money they owe. This status is considered temporary until the individual is able to earn a proper income.

Most lawyers advise debtors not to respond to debt collectors if they believe they are judgment proof. This way, the company or agency responsible for recovering money owed on delinquent accounts receives a default judgment.

State laws determine the assets and amount of wages that cannot be collected despite a judgment.

Example of Judgement Proof

Suppose a person — call him Mike — becomes too sick to work and uses a credit card to pay his living expenses and medical bills for a year. He recovers from his illness and goes back to work, but he can’t afford to repay the debt he accumulated. The credit card company fails in its debt collection efforts, then sells Mike’s unpaid debt to a collection agency.

The collection agency contacts Mike repeatedly, but he doesn’t pay them anything; he’s struggling to hang onto his house, buy groceries, and keep the lights on. As a last resort, the collection agency sues Mike and obtains a judgment against him for the unpaid debt. The agency now has a court order requiring Mike to repay a sum the court has determined to be valid.

However, because Mike barely earns more than the minimum wage, his wages can’t be garnished, and because he lives in a state that protects his primary residence from creditors, the collection agency can’t place a lien on his house. Mike has no money in the bank, and he doesn’t own a car or any other assets that can be seized and sold to repay his debt. Mike is currently judgment proof.

If Mike’s financial circumstances improve next year and he starts earning significantly more, the collection agency might then be able to garnish a percentage of his wages to start recouping what it is owed. Because judgments can remain valid for a long time and be renewed once they expire, creditors may be able to collect on Mike's debt many years down the road.