"What Does the Term 'Judgment Proof' Really Mean and Should I File Bankruptcy if I am Judgment-Proof?"

March 30, 2012

images[9].jpgBy 2008, resulting from the drecession, I was receiving approximately, 20 calls per month from individuals requesting that I file a Chapter 7 or Chapter 13 bankruptcy on their behalf because they were, amongst other things, being harassed by their creditors. At the Law Office of Linda C. Garrett, an online virtual law office, providing full-scope and limited-scope legal services in the practice areas of consumer law, mortgage and HAMP law, bankruptcy law and family law (to include unbundled legal services), I always caution my clients against making bankruptcy their first option--and instead, ask that they consider it their last option.

I take pride in helping my clients make informed decisions about their financial options--to, of course, include bankruptcy. For those who are truly judgment-proof (and/or insolvent or disqualified from filing bankruptcy), proving to creditors that a consumer debtor is judgment-proof is an excellent alternative to filing bankruptcy--with the debtor achieving almost identical results to discharging their debts in bankruptcy. And in some instances, a preferred alternative to bankruptcy!

Before I can determine whether or not a person is judgment-proof, I first need to determine whether the debtor is insolvent. Many individuals have heard the term "insolvency" before but have never found an opportunity to learn the actual concept or definition of insolvency.

Insolvency is a powerful tool in the debtor's tool-box. If an individual is insolvent, then the need for the individual to file bankruptcy is nearly non-existent. Simply put, the term "insolvent" means that the debtor has more debts and assets--and if all assets were sold, they would still be in the negative.

For many individuals, bankruptcy is not a choice they would make if they had another option. While filing bankruptcy serves to achieve a "fresh start" for the distressed debtor; for some, the fresh start comes at too high a price--literally.

Legal fees for filing for bankruptcy are high--ranging anywhere from $1,500 to $2,000 (and up--if additional motions are involved). In addition to paying the attorney's legal fees, there is the cost of filing the motion and the costs associated with mandatory pre- and post-debtor counseling. In addition to fees and costs, the debtor's creditor score and report will reflect a bankruptcy that will stay on his or her credit report for ten years.

For many folks, filing bankruptcy is not a practical solution to their financial problem. Below are some examples where filing bankruptcy is not a reasonable option:

The debtor's only debts are student loans and/or child support--which can't be discharged in Chapter 7 or Chapter 13 bankruptcy. These debts are rarely dischargeable in bankruptcy. For instance, an individual would need to show an extreme hardship to sway the court to agree to discharge student loans. The bankruptcy courts use the definitions utilized by the Social Security Administration.

The debtor has little debt, e.g. less than $5,000;

The debt (or debts) is over four years old;

The debtor wishes to serve in a fiduciary capacity in the next few years, such as a guardian of a minor, a conservator of an aged family relative, a trustee of a trust. A bankruptcy filing could disqualify the debtor as a candidate.

The debtor has a job whose security is so high that they would lose their security clearance (and job) if they filed bankruptcy;

The debtor intends to apply for a job that requires that the applicant have no bankruptcy on their record. (While it is illegal for an employer or prospective employer to discriminate against those who have filed bankruptcy; there are certain types of jobs where, inherent in the job position, is the requirement that the person is responsible with their own money. For instance, a person applying at a bank to be a bank teller may be denied if they have a recent bankruptcy filing on their record). Police departments, sheriff's departments and fire-departments have been known to not approve an application if the applicant previously filed bankruptcy.

The debtor has no job, owns no real-estate, has no bank accounts of any kind and has no unprotected assets. (In other words, all assets are protected from collection.).

The debtor only receives Social Security income.

The debtor expects to incur additional debts in the near future that don't exist today, e.g. medical debts.

The debtor is in the middle of a non-bankruptcy loan modification with their bank. Filing bankruptcy could abruptly interfere or stop the loan modification in its tracks.

For those individuals who are insolvent, mailing, via certified mail, a "judgment-proof" letter can be very effective--IF the letter contains evidence (proof) of insolvency.

Once I determine that a person is insolvent, I then consider whether they have any discretionary income from their wages to pay their creditors. For many folks, all their take-home pay goes towards their basic necessities and there is nothing left over at the end of the month.

So, let's recap: if a person is insolvent and also has no discretionary income after their pay their basic necessities; and, this situation is not going to change for several years (or is permanent), then the debtor is deemed "judgment proof."

So, what then, does it mean to be "judgment proof.?" It means, when the consumer debtor is insolvent and has no discretionary income after payment of his/her basic necessities that the judgment creditor is unable to collect on his judgment. For instance, there is no home to put lien on (or the home is severely under water), no savings or bank accounts to levy, and no wages to garnish. An important distinction: can a judgment creditor attempt to levy a bank account or garnish a person's wages? Absolutely! However, if a person is judgment-proof and can prove it--in a timely fashion by filling out a Claim of Exemption form with Financial Statement, then, chances are, the consumer can intercept the creditor's attempts to levy bank accounts and/or garnish wages.

Need Help?

Ms. Garrett, a California consumer, bankruptcy, mortgage (HAMP) and family law attorney, at the Law Office of Linda C. Garrett, is available to assist individuals to determine, after conducting a thorough exam and analysis of their financial situation, whether they are insolvent and judgment-proof. And if insolvent, and judgment-proof, providing them with future guidance and/or coaching (or limited-scope legal services) in connection with their financial matter, to include, if requested, assistance with preparing their Claim of Exemption forms and Financial Statement.

Bankruptcy is a wonderful solution for most, but not all, consumers. It is important to determine whether bankruptcy or insolvency is right for you. The only way to make this important determination is understand your financial situation as it relates to these two important options.

For further information, click on the following links:

Some helpful links:

Contact the Law Office of Linda C. Garrett--to set up a 30-minute free consultation or paid consultation

Services--to learn the types of services the Law Office of Linda C. Garrett provides

Practice Areas--to determine the other areas of law the Law Office of Linda C. Garrett can provide consumers.

Attorney Profile--to learn more about Ms. Garrett, Ms. Garrett's goals, Ms. Garrett's philosophy and how she "Gives Back".

California Family Law and Divorce Blog

Other Bankruptcy Related Blog posts: "Am I Judgment Proof? Take the Test"