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Judgment-proof debtors have an imperfect shield

By Fred O. Williams
Published: May 06, 2014

Judgments: You're judgment-proof If you are hit with a judgment for debt, there is a chance that none of your wages or belongings are eligible to be seized. You are "judgment proof" -- but that does not mean you can sit back and do nothing.

People with modest income and little property may be exempt from seizure of their wages and assets to satisfy a debt. Federal and state protections set limits on what creditors may seize, even with a court judgment, so that families are not made destitute. The protections are even stronger for people with credit card debt than for those who owe taxes or child support.

Under the U.S. Consumer Credit Protection Act, a creditor is limited to 25 percent of your disposable earnings above $290 a week, based on a formula using the $7.25 federal minimum wage. If your disposable income is $217.50 a week or less, none of it may be seized. Disposable earnings are earnings after required deductions such as taxes, Social Security, unemployment and state retirement programs.

Twenty-seven states set higher protections than required under the federal law. Four of them -- North Carolina, South Carolina, Pennsylvania and Texas -- allow no wage income to be garnished for credit card debt.

State law also protects homes, used cars and household goods from seizure, if the value of the items falls below certain thresholds. To find the cutoff points in your state, check the appendix of the National Consumer Law Center report, "No Fresh Start."

Also exempt from seizure are government benefits including Social Security, unemployment and public assistance. Banks are supposed to check your account for these deposits before acting on garnishment papers. Rex Anderson, a consumer lawyer in Michigan, advises not to rely on this protection. Instead, it is a good idea to send the creditor and district court an affidavit swearing that you do not mix exempt and nonexempt funds in your account, and back it up with copies of three recent account statements. As the statements will be entered in the court record, black out the account number and any other sensitive data or personally identifying information.

"Make sure you serve a copy on the creditor," Anderson said. "Then if they garnish the account, you have a case under the FDCPA." The Fair Debt Collection Practices Act usually comes up in connection with pre-judgment debt collection, but its protections from harassment, deception and unfair tactics also apply to post-judgment collection efforts. Violations of the law can result in a $1,000 penalty, paid to you from the offending debt collector.

Amazingly enough, your belongings can be seized on the spot. The cash in your wallet is not exempt; the watch on your wrist is not necessarily exempt.

-- Martin Wegbreit  
Central Virginia Legal Aid Society, Richmond, Va. 

It is important to know that, even if you're judgment proof, you may be made uncomfortable. Some creditors may do their best to maximize your discomfort as leverage for payment, lawyers say. Having your employer told to deduct sums from your pay can be embarrassing. And in most states, a judgment creditor can summon you to answer questions about your income and assets. In some jurisdictions, it's a good idea to remove your jewelry before you go, and to empty your wallet.

"Amazingly enough, your belongings can be seized on the spot," said Martin Wegbreit, director of litigation at the Central Virginia Legal Aid Society in Richmond. "The cash in your wallet is not exempt; the watch on your wrist is not necessarily exempt."

Police could bring you in
Failing to attend the proceeding, called a "debtor's examination" or "debtor's interrogatories," is risky, as the court may issue a warrant for police to bring you in for failing to appear. In some jurisdictions creditors routinely use courts to collect this way. "In many arrest warrant cases, judges will order that the bond which the defendant paid be released to the judgment creditor," Maryland University law professor Peter Holland wrote in his analysis of the debt buying system. However, backlash against the practice has developed after articles in the Minneapolis Star-Tribune and The New York Times examined what has been called a modern form of debtors' prison.

"I don't think the sheriff is going to go out looking for you," said Fred Schwinn, a consumer lawyer in San Jose, California. "But if you get pulled over for something else, they could bring you in."

Another risk of toughing out a judgment is that the creditor will resurface -- perhaps years later -- when you are flush. "Debt collection attorneys at times frisk their old files for judgments to try to collect," Schwinn said. Debt buyers monitor credit reports for signs that your circumstances have improved, such as a new address or a new job. "They're using analytics to determine what cases they'll file." Given the lengthy life span of a debt judgment, it is not safe to assume the debt will be forgotten.

Main story:  Court judgments for debt: after the gavel