In Bankruptcy Information, Bankruptcy Questions, consumer law

You might think that if someone is judgment proof, no one can get a judgment against them. No, that’s not correct.

What Does “Judgment Proof” Mean?
What it means is that even though a creditor has a judgment or can get a judgment, the creditor has no way to collect the judgment. Sometimes that’s because the debtor can’t be found. Usually that’s because the debtor has only exempt assets that the creditor can’t reach.

Exemptions
All states have some form of exemptions from collection. Certain property is considered essential to maintaining life. These include food, clothing, some types of home furnishings such as stove and oven, microwave, kitchen and dining room tables, chairs, sofas, and beds. These items generally enjoy unlimited exemptions, regardless of value. Other items, such as cars and houses, are exempt up to a certain value. A car in Utah is exempt up to $3,000, while a person holds a $42,000 exemption in a home. Some types of income, such as Social Security, retirement income, and unemployment compensation, are exempt and can’t be garnished.

Exemptions serve to protect the exempt property from creditors’ claims. For example, if the amount of equity in a debtor’s home (the home’s value minus the outstanding mortgages) is less than $42,000 ($84,000 if the debtor is married), the homestead exemption protects the equity. If the debtor’s income is from exempt sources, such as retirement income (IRAs, 401(k)s, pensions or the like), or is Social Security or disability, the income is exempt and can’t be garnished. If all the debtor’s personal property (cars, household furnishings, etc.) consists of exempt property, it can’t be attached or taken by a creditor. In such a case, the debtor is said to be judgment proof.

Becoming non-judgment proof.
Not all judgment proof debtors remain judgment proof. If a debtor doesn’t have equity in her home now, in several years, with the combination of paying down a mortgage and the value increasing, there might be equity. If a debtor who was living on unemployment compensation (which can’t be garnished) gets a job, that income is non-exempt and can be garnished. If the debtor receives an inheritance, that is not exempt. Judgments are valid for eight years and can be renewed.

Being Judgment Proof Doesn’t Protect from Creditor Harassment.
In most states, creditors who hold judgments against debtors have the ability to question the debtor periodically about her assets and income. In Utah this is called an Order in Supplemental Proceedings, or, as it’s commonly called, a “supp order.” When a debtor is served with a supp order, she is required to appear in court where the creditor can ask questions about what the debtor owns, where she works, where she banks, and anything else that might help the creditor collect the judgment. If a debtor doesn’t appear for a supp order, the creditor can get a bench warrant and have the debtor arrested. The creditor can bring the debtor in on supp orders as long as the judgment is valid. Even though the debtor is judgment proof one time, it doesn’t mean in six months the debtor won’t have assets that can be collected. So, being judgment proof doesn’t mean that a debtor is free of her creditors.

Judgments Stay on Credit Reports for Years.
Judgments stay on credit reports for 8 years, after which time they become stale, unless they are renewed. A bankruptcy stays on credit reports for 10 years, but there’s a big difference. A bankruptcy creates a bright line after which all those debts go away. Judgments, on the other hand, count against you as long as they are valid. Five years after filing bankruptcy, the bankruptcy is ancient history. Five years after a judgment is entered, that judgment is alive and well and subjecting you to collection action. That’s why bankruptcy is called a “fresh start:” you get to start over unencumbered by old debts.

If You’re Judgment Proof, What Should You Do?
If you’re truly judgment proof, creditors can’t harm you in any meaningful way. There are no wages to garnish; no property to attach; no house to foreclose on. If you can live with the occasional harassment of showing up on a supp order, you might be able to ride things out. But remember, those judgments are holding you back from getting a good job, a house, a car, and otherwise moving on with your life.

If you have bankruptcy or other creditor-debtor questions, contact us here, or call or text (801) 413-3708, or email steve@schamberslaw.com.

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