Why do some people file bankruptcy even though they are “judgment-proof”?
I regularly see prospective clients who come in asking about a bankruptcy filing to relieve crushing debt, except these clients don’t own homes, have a modest vehicle, don’t earn any income other than retirement or Social Security, and otherwise have no assets. In other words, they are “judgment-proof.” Lawyer-speak for someone from whom you can’t get anything even if you file a lawsuit against that person and you get a judgment against that person. A judgment sounds effective and official, but it can’t do anything or get anywhere if the judgment debtor (the person who owes the money) is “judgment-proof.”
You can’t garnish that person’s bank account if that bank account only receives deposits from a retirement fund, Social Security or the VA, for example. You can’t garnish the source of those funds. You can’t get anything from them. But a creditor or judgment creditor sure can get that person’s peace of mind though.
Which is why I see those prospective clients come through my door. I tell them that 50% of people in that situation end up filing, and 50% end up not filing. There is absolutely nothing wrong with NOT filing a bankruptcy if you are judgment-proof. If you choose to file, your bankruptcy trustee will likely ask you whether you are aware that you are not required to file a bankruptcy. At least one trustee in the area will actually chastise you and/or the lawyer for filing a bankruptcy. (But the scolding is just that and will have no legal effect on your ability to otherwise receive a legal discharge of your debts)
If you don’t file, you may have some reprieve if you tell the creditor to cease and desist all communication with you. If the creditor is a third party collector (a collection agency who has the right to collect on the debt you owe), they must honor your cease and desist request. But the creditor doesn’t really take your word for it that you are judgment-proof. In fact, I doubt these creditors have any real way to pull your file from their stack just because you’ve made them aware you are a lost cause.
Consequently, some of these creditors will still sue a judgment-proof person which causes much stress and dissonance for that person. Does that person answer the lawsuit? Hire a lawyer? Appear in court? Say what to the Judge? Those questions and uncertainty drive many judgment-proof people to still file a bankruptcy despite not legally needing one.
What should you do if you are such a person? Well, it’s a personal choice. It’s not legally required but filing a bankruptcy (if you otherwise qualify) ensures legal resolution of those debts. Not sure? Call us and visit with us for a free consultation so you may find out what is right and best for you.
By Karen Maxcy, W M Law Attorney