Collection agencies occasionally sue debtors as a last resort to collecting payment for an old, charged-off debt. Should the debt collector win the lawsuit, it becomes a judgment creditor and has the power to use legal means to collect money from the debtor involuntarily.
How a Judgment Creditor Collects a Debt
Judgment creditors may still telephone the debtor or send letters demanding immediate payment, but they have additional collection options as well. These options include:
- Wage garnishment
- Bank account garnishment
- Property liens
Through wage garnishment, a judgment creditor may demand that an individual’s employer withhold a portion of his earnings each payday and turn the amount withheld over to the collection agency. Bank account garnishment allows a collection agency to seize any non-exempt funds present in a debtor’s bank account. A property lien permits the collection agency to put a lien against the individual’s home. When the home is sold or transferred to another owner, the collection agency collects the debt it is owed before the homeowner gets paid (See The Use of a Judgment Lien to Collect a Debt).
How Being Judgment Proof Can Stop a Creditor Lawsuit
When an individual is judgment proof, a creditor lawsuit may still occur, but if the creditor wins, it will have no method of collecting the debt - even with the additional rights it receives as a judgment creditor (See Avoid a Default Judgment). A few examples of individuals who are judgment proof:
- Consumers living on Social Security. Because social security is exempt from garnishment by a collection agency unless the debt collector has been assigned to collect a federal debt (such as student loans), the judgment creditor may neither withhold social security payments nor seize them from the debtor’s bank account via a bank account garnishment.
- Unemployed individuals receiving unemployment benefits. Consumers who are unemployed do not receive wages that can be withheld via wage garnishment. In addition, unemployment checks are exempt from being seized via a bank levy.
- Individuals who live on welfare or alimony. Like unemployment, government assistance benefits and alimony payments are exempt from garnishment. Child support payments are also exempt.
- An individual who works part time or barely makes enough money to pay his bills. Because a judgment creditor can only hope to garnish a portion of a debtor’s disposable income, a debtor without any disposable income is immune to garnishment and therefore judgment proof.
Keep in mind that in order to be truly judgment proof, an individual must live on income that is exempt from garnishment and also own no property (See The Wage Garnishment Process and Collections).
Notify Debt Collector of Judgment Proof Status
Even though a collection agency cannot force a judgment proof debtor to pay via legal means, it can still obtain a judgment. That judgment will appear on the individual’s credit report and damage his or her credit score for up to seven years. This can be prevented, however, if the consumer being sued notifies the collection agency’s attorney of his or her judgment proof status prior to the date of the lawsuit.
Collection agencies often add the attorney fees and court costs they pay to file the lawsuit to the amount the debtor owes. This allows the debt collector to recover its full investment. If there is no way to recover any portion of the debt, suing the debtor is a waste of money for the company and it will often drop the suit entirely.
Being judgment proof and notifying the collection agency of that fact after receiving notification of an impending lawsuit can result in the debt collector dropping its bid to become a judgment creditor. Without a judgment, the creditor cannot use legal force to collect the debt at any point in the future if the consumer’s circumstances change. Because each state provides only a limited amount of time in which collection agencies may sue consumers, this can result in an individual legally avoiding garnishment or property liens.
Sources:
Federal Trade Commission: Creditors Seeking Federal Benefits in Your Bank Account
NYC Department of Consumer Affairs: Debt Collection - Money Judgments and Frozen Bank Accounts
Candice Edwards - Candice Gillingwater is a credit specialist and consumer advocate currently living in Georgia. Her goal is to educate the public about ...
