What “Judgment Proof” Means

“Judgment proof” means you don’t have income or assets a creditor can seize to pay off the money judgment on a debt. Being judgment proof doesn’t equate to being debt-free, as you can still have outstanding debts to creditors. The question about whether someone is judgment proof or not hinges on what assets a creditor might legally claim to collect a debt, and what remains protected. Even if your assets are small, it is important to understand what happens if a court mandates you to fulfill a financial obligation to a debtor.

How Do I Know if I am Judgment Proof?

If you are unable to settle a debt, the creditor (i.e., the individual or entity to which you are indebted) can take legal action in an attempt to recover the funds. With the exception of non-payment of child support, defaulting on debt does not typically lead to imprisonment.

The creditor may obtain a court judgment against you for the accumulated debt, plus interest. Being “judgment proof” means your assets and income are shielded from such claims by creditors, as they are safeguarded, or exempt, under legal statute.

When your income and possessions are exempt, creditors have nothing to confiscate. Being judgment proof means the assets and income you have are exempt from garnishment, attachment, execution, or other seizure.

What Sources of Income are Judgment Proof?

Your income is judgment proof if it is primarily from protected categories, such as:

• Retirement or pension benefits (e.g., IRA, 401(k), annuities).
• College savings plans (e.g., 529 plans).
• Life insurance proceeds.
• Social Security or Social Security Disability income.
• Supplemental Security Income (SSI) benefits.
• Veterans’ benefits.
• Court-ordered child support and alimony.
• Workers’ compensation benefits.
• Vocational rehabilitation (VR) benefits.
• Other forms of government assistance (e.g., welfare, unemployment income, Federal Emergency Management Agency (FEMA) assistance).

What Assets are Judgment Proof Assets?

Your assets are judgement proof it the property you own falls within the exemption limits defined by state or federal laws, such as:

• Vehicles: One vehicle per licensed driver in the home.
• Personal Items: Certain personal items (e.g., tools of your trade, clothing, necessary household goods, pets, sporting equipment, bicycles).
• Homestead: Equity in your primary residence with a homestead exemption, up to 10 acres of urban property (single or family) or rural property of 100 acres (single) to 200 acres (family). However, your homestead can be foreclosed if you are behind on mortgage, property tax, or home equity payments (see Texas Property Code Chapter 41).
• Personal Property: Up to $50,000 for an individual, or $100,000 for a family

Understanding your protected assets and income sources is crucial in determining whether you are effectively judgment-proof, and knowing your rights can be essential in managing debt. See Texas Property Code Section 42 for a complete list of exempt assets.

What Assets are NOT Judgement Proof?

Many assets do not have the same protected exemptions and can be subject to creditor claims. These non-exempt assets can be used to satisfy debts, such as:

• Cash: Cash savings or checking account balances not derived from protected income sources.
• Investments: Investment portfolios, such as stocks, bonds, and non-retirement mutual funds.
• Additional Vehicles: Second vehicles, especially if their value exceeds a certain threshold.
• Real Estate: Real estate property other than your primary residence.
• High Value Household Items: Non-essential electronics and other high-value items that don’t qualify as necessary household goods.
• Collectibles: Jewelry, art, or collectibles that are not defined as necessary or part of your trade, nor are family heirlooms.
• Other Income: Additional income like rental earnings or business revenue that is not protected under exemption categories.

Understanding which of your assets are not protected is equally vital for effective debt management. Knowing this can prepare you for potential legal actions that a creditor may take after receiving a court judgment.

Can Creditors Take My Wages?

Wage garnishment is a legal process where a court orders your employer to withhold a portion of your income to repay a debt. In Texas, creditors can garnish wages only for specific types of debts, such as unpaid taxes, federally insured student loans, child support, alimony, and federal government debts.

However, for other types of debt like credit card debts, medical bills, auto accident claims involving uninsured motorists, and personal loans, Texas law offers robust protection for individuals by prohibiting wage garnishment. If a debt collector threatens to garnish your wages for these types of debts, they may be misrepresenting the legal actions they can actually take, which is prohibited under the Fair Debt Collection Practices Act (FDCPA).

Can I Transfer Property to My Spouse or Children?

When it comes to protecting assets from creditors, it cannot be done after a lawsuit has been filed against you. Under Texas fraudulent transfer laws, transfers made with the intent to hinder, delay, or defraud creditors may be reversed if they are deemed fraudulent. This means that if you transfer property as a way to avoid paying debts, creditors can potentially challenge these transfers in court to have them undone.

How Long Does a Creditor Have to File a Lawsuit to Collect a Debt in Texas?

In Texas, creditors have a specified window within which they must take legal action to collect a debt. Referred to as the “statute of limitations,” this legal timeframe is delineated under Texas Civil Practice and Remedies Code § 16.004, which establishes that creditors must file their lawsuit within 4 years of the date of default.

If this period elapses without the creditor initiating legal proceedings, they lose the legal right to enforce the debt through the court system. However, just because the statute of limitations has expired does not mean the debt is forgiven; it simply means the creditor cannot use the judicial process to force repayment.

What Should I Do if I’m Sued by a Debt Collector or Creditor?

If you find yourself subject to a lawsuit by a debt collector or creditor, do not ignore the lawsuit; responding within the time frame stipulated is crucial to protect your rights. You can respond to the lawsuit yourself, but seeking legal advice is advisable, especially to understand the implications of the suit and to explore your options. For example, in personal injury cases, debt collectors will often allow you to set up a payment plan or wait until your case settles to pay the debt.

The Consumer Financial Protection Bureau (CFPB) provides guidance on the steps to take if you are sued by a creditor, which includes verifying the accuracy of the debt, considering defenses you may have, and being aware of what assets and income of yours are protected. Keep in mind that each state’s laws regarding debt collection can differ, and it may be beneficial to consult an attorney who specializes in debt collection for further assistance.

Will I Stay Judgment Proof in the Future, or Will the Judgment Expire?

Maintaining judgment proof status over time can be challenging as financial circumstances may change. Key factors impacting this status can include increases in income, acquiring additional assets, changes in state law, or different types of debt incurred.

Judgment creditors can renew the court’s judgment against you every 10 years (Texas Civil Practice and Remedies Code § 34.001). If the creditor does not file a request for renewal of the judgment with the court within that timeframe, the judgment will become dormant. If the judgment becomes dormant, the creditor has 2 years to try and revive a dormant judgment (Texas Civil Practice and Remedies Code § 34.006).

Why Do Personal Injury Lawyers Say Most Uninsured Motorists are Judgment Proof?

Personal injury lawyers often say that most uninsured motorists are judgment proof due to their lack of substantial assets or sufficient income that could be targeted to satisfy a court judgment. Uninsured motorists might either have a lower income bracket or may not own property that can be easily attached or garnished.

Since being judgment proof effectively means that a judgment creditor would be unable to enforce the court’s judgment through traditional means, this limits the options for victims to obtain compensation through legal awards if they are involved in an accident with an uninsured driver.

In such cases, even if a personal injury lawsuit is won in court and a judgment is awarded, collecting on that judgment can prove to be infeasible. Thus, most claims involving uninsured motorists are best handled by the injured party in small claims court.