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‘Judgment Proof’ Debtors and Bankruptcy

Creditors sometimes characterize debtors as “judgment proof,” but what does this mean and why does it matter for debtors considering New York bankruptcy?

As an answer to the first question, “judgment proof” isn’t a legal term; it’s made up by lenders. It means that even though the creditor has a judgment against a debtor, the debtor has neither the ability to pay the judgment nor any assets the creditor can try to seize and liquidate to pay it. To be clear, “judgment proof” does not mean a creditor is legally unable to obtain a judgment against a debtor; rather, it means the creditor can’t enforce a judgment against a debtor once it has one.

The creditor’s options for judgment proof debtors is limited. It can either wait until the debtor is in a better position to repay the debt, or it can charge off the debt and sell it to another party at a steep discount. Waiting might allow the creditor to obtain the full amount of the judgment, but the statute of limitations might run out or the creditor might run into difficulties renewing the judgment. Meanwhile charging off the debt gives the creditor a tax break and a chance to move on, but it doesn’t get much for its trouble.

As for debtors, if they’re judgment proof, then there’s a question as to whether filing bankruptcy is really worthwhile. Indeed, New York provides debtors many significant protections from creditors trying to enforce judgments against them. In fact, many of these protections are identical to the property exemptions New York bankruptcy offers debtors. Essentially, judgment proof debtors receive many of the benefits of bankruptcy without filing.

Where debtors don’t benefit, however, is collection efforts by persistent creditors. Because these creditors will go to great lengths to enforce judgments, they may still use all the tools state and federal law permit them (and not) to collect them. A chapter 7 bankruptcy enacts an automatic stay against creditors’ enforcement efforts and might ultimately discharge those debts in bankruptcy, preventing them from even counting as income for income tax purposes.

Conversely, debtors might owe some of the types of debts that are excluded from a chapter 7 discharge order, and there are quite a few, such as most tax debts, domestic support obligations, or debts for injuries created by operating a motor vehicle while intoxicated. If a chapter 7 or chapter 13 bankruptcy won’t extinguish these debts, and the debtor’s assets are otherwise protected from creditors, then the judgment proof debtor would probably be better off not filing bankruptcy.

Debtors can be judgment proof for different reasons, but some may benefit from bankruptcy more than others, particularly ending collection efforts and the possibility of keeping higher income in the future. If this describes your financial circumstances, then discussing your situation with an experienced New York bankruptcy lawyer can help.

For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

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