If you don’t have funds or property that a creditor can reach, a creditor can’t collect its debt. You’re “judgment proof.” Taking steps like filing for bankruptcy usually isn’t necessary if your judgment-proof status is permanent. However, if you think your financial status will change for the better, wiping out debt by filing for Chapter 7 bankruptcy might be a good idea.

Creditors Can’t Take Assets When You’re Judgment Proof

Sometimes it’s easy to know when you’re judgment proof—you don’t have anything of value that a creditor could take to satisfy your debt. In fact, most judgment-proof people share common characteristics.

For instance, they:

• have little or no equity in a home or other real estate
• own minimal personal property (things other than real estate), and
• are usually unemployed.

Even if you have assets, you’ll still be judgment proof if the property is the type that the law protects from a creditor’s reach.

• Federal law protection. For instance, because federal law doesn’t allow a creditor to levy against Social Security funds, a retiree whose only source of income is Social Security might be immune to a creditor’s judgment. (Important tip: It’s important to recognize that mixing Social Security benefits with other funds in a single account might result in a loss of the protection.)
• State law protection. States also offer additional protections. Each state allows residents to protect, or exempt, a small amount of property from creditors seeking to satisfy a debt. Common examples of exempt property include household furnishings; clothing; a small amount of equity in a modest car; and some, but not all, retirement accounts. You can check your state’s exemption statutes to determine whether it will protect your property.

Most creditors understand state and federal exemptions well and will proceed against you only if you have assets that you can’t protect. If you’re facing a collection action and aren’t sure about your rights, a knowledgeable attorney can tell you if you stand to lose property and the options available to you.

Whether You’re Permanently or Temporarily Judgment Proof Matters

If you’re permanently judgment proof—you know that your situation won’t change in the future—you don’t need to worry. Creditors won’t be able to take action against you.

However, just because you don’t have much now doesn’t mean that you’ll be in the same situation six months down the road. It’s common to recover after a financial setback.

If you suspect that your financial picture will improve, you might want to consider filing for Chapter 7 bankruptcy. Some of the benefits? You can take advantage of the fact that your income is low enough to qualify for a Chapter 7 discharge (the order that wipes out debt) and get your credit back on track sooner rather than later.

If you wait and your income rises, you might make too much money to file for Chapter 7 bankruptcy and find yourself stuck with debt, or might have to repay a portion of your debt through a Chapter 13 bankruptcy repayment plan.

(To learn more about how filing for bankruptcy can help judgment-proof individuals, read Should I File for Bankruptcy if I’m Judgment Proof?)

Collection Tools: Understanding What a Creditor Can Get

You probably know whether you own anything of value—and even whether a creditor can take it. Even so, it’s a good idea to be familiar with the collection tools as a creditor’s disposal.

Typical collection procedures include:

• requiring your employer to take money out of your paycheck (wage garnishment)
• instructing your bank to withdraw money from your account (bank levy)
• selling your home, rental property, or commercial real estate at auction (real estate levy or attachment)
• seizing your car, boat, stock, the contents of your safe deposit box, or other property (personal property levy or attachment)
• instructing the sheriff to take money from the cash register of your business (till tap), or
• directing the sheriff to station an officer in your business, who will collect all payments made by your customers (keeper).

Not every creditor has the right to use these tools immediately. But all creditors can access them after going through the proper process. (To learn more about the debt collection process, see Delinquent Debt: What to Expect in Debt Collection.)

Steps a Creditor Must Take Before Using Collection Tools

When you owe a past-due debt, any creditor can ask you to bring your account current by calling you on the telephone or sending you an email or letter, but most creditors can’t force you to pay your bill without doing more. Such creditors must first go to court and win a money judgment against you.

Other creditors can skip the court step and instead, start garnishing your wages, for instance. The procedure required varies depending on the type of debt you owe.

Creditors Who Don’t Need a Money Judgment

Creditors that aren’t required to go to court can go after your assets almost as soon as you fall behind on payments. Here’s a general overview of creditors with special collection rights.

• Creditors with a voluntary lien. A voluntary lien is a property right you give a lender when you make a large credit purchase. For instance, when taking out a loan for an expensive item, such as a house or car (or even when financing appliances, jewelry, furniture, and computers), the lender will usually you to put up the property you buy as collateral. By agreeing to do so, you give the lender a lien on the property that secures the payment of the debt. A secured creditor can take back the collateral if you fall behind on your payment, sell the property at auction, and use the proceeds to pay down the loan balance. For instance, a secured lender can repossess your car if you fail to pay, and, in some states, your mortgage lender can avoid a lawsuit by initiating a nonjudicial foreclosure if you fail to stay current. (However, some states require a mortgage lender to court and win a judicial foreclosure action before foreclosing on your home.)
• Creditors with an involuntary lien. When you don’t pay certain obligations, some creditors—such as government agencies—get a property right called an involuntary lien that allows the creditor to place a lien on your property when you fall behind on a tax or utility bill. For instance, an IRS tax assessment works just like a court judgment, which means that if you owe back taxes, the IRS can wipe out your bank account or force your employer to deduct money from your paycheck without first getting a court judgment. A similar lien is the mechanic's lien, although with this lien, the creditor usually places it on real estate and gets paid when the owner sells the property. (Learn more in What Is an Involuntary Lien?)
• Student loans and domestic support obligations. If you fall behind on a student loan or a support obligation, the creditor can take steps to collect the debt right away—often through wage garnishment.

Not all creditors get these rights. Most other creditors, such as the holder of a major credit card account, must first file a lawsuit against you and prove that you owe the debt.

Creditors Who Must Get a Money Judgment First

If a creditor doesn’t have a property lien or a statutory collection right, then the creditor must file a lawsuit, prove that you owe money, and get a money judgment against you. Most major credit card companies, healthcare providers, personal loan lenders, and service providers must use this approach.

For these creditors, it’s the money judgment that allows the creditor to use collection tools to go after your assets and satisfy the debt. Once the creditor has a money judgment, it can place an involuntary lien on your property. In some states, a money judgment gives the creditor an involuntary lien automatically on certain property.

Questions for Your Attorney

• Do I have any assets that a creditor can take from me or am I judgment proof?
• Could a creditor collect against me if my judgment-proof status changes?
• Should I file for bankruptcy even though I’m currently judgment proof?