When you are faced with a debt that you cannot pay, you have three options: (1) do nothing; (2) negotiate with the creditor; or (3) file bankruptcy. In cases of unemployment or a fixed income, option two, negotiate, is no option at all. There is simply no extra money to pay the debt and nothing to sell. When there is no income that is legally collectible and all assets are legally exempt from collection, the debtor is commonly called “judgment proof.” If you or your attorney think you are “judgment proof,” be sure that you fully understand what that term means before “doing nothing.”
In collection law the term “judgment proof” is actually a misnomer. The term refers to the difficulty a creditor has in collecting on a judgment, not in obtaining the judgment. If you are “judgment proof,” you can still be sued for a debt and a court can still issue a judgment against you.
It is important to protect your rights any time you are involved in a lawsuit. The court may order you to appear in court, and you must comply or risk being held in contempt for violating the court’s order. The creditor may also attempt to seize personal assets or money from your bank account – usually without any notice. You must inform the creditor and the court that you are asserting your legal exemption rights to protect your property. The creditor may challenge these exemptions in court, in which case you must litigate the matter or risk losing your protections.
A judgment is good for many years, and can be renewed. The creditor can attempt to collect from you at any time, especially if your financial circumstances change. If the debt is truly uncollectible, the creditor may “charge off” the debt and report it to the IRS. The cancelled debt is now taxed as your income and you must inform the IRS of your insolvency.
Most “judgment proof” debtors have no idea of the inconvenience that a lawsuit can cause, not to mention the harassment before and after a lawsuit. A Chapter 7 bankruptcy can discharge your debts. The bankruptcy automatic stay immediately stops all collection action, including lawsuits and telephone harassment. Once discharged, the debt is not considered income by the IRS, and it is permanently uncollectible. The creditor can never sue you or contact you regarding the debt.
If you have debts that you cannot pay, speak with an experienced bankruptcy attorney and find out how the federal law can protect you and your property. Bankruptcy can provide permanent peace of mind, and a chance at a fresh financial start free from creditor harassment.
