Bankruptcy is a legal process that discharges most debts, but has the disadvantage of making it more difficult for an individual to borrow in the future. To avoid the negative impacts of personal bankruptcy, individuals in debt have a number of bankruptcy alternatives. One such alternative is declaring judgment proof.
A person is said to be judgment proof when s/he has no substantial assets that a judgment creditor could use to satisfy a judgment. However, the lack of ability to pay a judgment is not a legal defense to a lawsuit and a creditor can still sue for any unpaid debts. Judgments stick around for several years and if a judgment debtor’s financial condition improves and s/he is no longer judgment proof, then the creditor will be able to collect the debt.
A person will be considered judgment proof if they:
- do not own a house; or
- do not own any assets, for example, savings or jewellery other than ordinary household items or tools of trade.
Creditors can’t obtain money from people who are judgment proof because they are:
- insolvent, having no assets to be collected;
- don’t have enough property to pay a creditor’s claim or judgment; or
- protected by laws that exclude wages and property from being used to pay a debt.
Bankruptcy prevents a person’s creditors from obtaining a judgment against them. Since bankruptcy makes a single claim of exemptions for all presently existing creditors, bankruptcy might be beneficial even for a judgment-proof person. Filing bankruptcy while one is judgment proof allows the future to be open to improved finances without the old judgment hanging overhead.