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 is judgment proof. A debtor who only has certain legally protected types of assets or income is also judgment proof. State laws determine the assets and amount of wages that cannot be collected despite a judgment. 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 for long after they win a lawsuit against a delinquent borrower.

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. They might even be able to collect on the debt if his situation improves many years down the road because judgments can remain valid for a long time and renewed once they expire.