Being judgment proof means that you do not have anything for a creditor to collect if they sue you and win. As you can imagine, this means that they are not likely to sue you. It does not mean that they can't sue you, just that they probably won't be able to collect if they do decide to take you to court.
Written by Attorney Jonathan Petts.
Updated August 27, 2021
You're judgment proof if you don't have anything for a creditor to collect if they sue you and win. If this is the case, creditors are unlikely to go through the effort of suing you. But, this doesn't mean they can't sue you, just that they probably won't be able to collect if they do take you to court.
You are usually judgment proof when all of your income is exempt, you don't have any cash in the bank, you don't have any equity in real estate, and all your assets are exempt.
The 4 Factors of Being Judgment Proof
Federal law limits how much of your wages and income a creditor can garnish. Wage garnishment is limited to the lesser of 25% of your take-home pay or the amount by which your income exceeds 30 times the federal minimum wage. This is currently $217.50 a week.
Creditors also can't take any income that you earn from the following sources regardless of the amount:
Social Security benefits
Supplemental Security Income benefits
Federal employee and civil service retirement benefits
No Cash in the Bank
If you have money in cash or in a bank account that is from nonexempt sources (see list above of exemptions), a creditor that sues you may ask the court to freeze that money so that they can collect it. If you don't have any nonexempt cash or money in the bank, there is nothing for a creditor to freeze and seize.
Real Estate Equity
If you don't have any equity in real estate, you may be judgment proof. If do you do have equity in real estate like a home, creditors are allowed to place a lien on your real estate in order to ensure that they are paid. If they attach a lien to your property, you will have to pay it off before you can sell or refinance that property. If you do not have any real estate equity, there is nothing for a creditor to attach a lien to.
Each state (and the federal government) has a list of commonly owned items, or assets, that can be exempted from collection up to a certain dollar amount. If your assets are worth less than these amounts, the creditor will not be able to seize them if they win a judgment against you in court.
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Am I Judgment Proof?
If all of the above apply, then you are probably judgment proof. But it's important to remember that you may not always be. If a creditor garnishes your wages or gets a lien on your property while you are judgment proof, and if that garnishment or lien lasts until you are earning more or purchase property, that creditor can come after your assets at that future time.
This is why filing bankruptcy when you are judgment proof can be so helpful. If you expect your financial situation to improve in the future, there's a chance that any creditors that couldn't come after you before will do so when you're no longer judgment proof. If you choose to file bankruptcy instead, the debts you have now will be forgiven and no one will be able to come after you for them regardless of how much you make or own in the future.
On the other hand, if you are judgment proof, have good credit that you need to keep, and don't expect your financial situation to change, filing bankruptcy may not be a good idea. Figuring out whether or not to file bankruptcy when you're judgment proof is highly personal. Be sure to take a good look at your assets, needs, and future plans before making a decision.