You are a small business owner trying to collect from a few deadbeat customers. You have contacted your attorney to learn more about suing them in civil court, but your attorney advises you to reconsider. His concern is that these particular customers might be judgment proof. If they really are, you could spend a lot of time and money in court only to never be paid anyway.

What does it mean to be judgment proof? For that, we turn to Judgment Collectors based in Salt Lake City, UT. Judgment Collectors is a collection agency that specializes in judgments. They operate in eleven states.

Judgment Collectors explains that some debtors claim to be judgment proof even though they are not. A quick asset search reveals as much. Yet there are legitimately judgment proof debtors. To be judgment proof, a debtor must meet the following three conditions:

1. Insufficient Income

There are two ways to collect an unpaid judgment based on a debtor’s income. The first is setting up a voluntary payment plan. The debtor agrees to pay so much per month until the debt is satisfied. The total could be the full amount owed plus additional interest and legal fees, or the creditor could settle for a lesser amount.

The other way to collect based on income is to garnish a debtor’s wages. Most states only allow garnishing a certain percentage of a debtor’s disposable income. But insufficient income could leave too little to garnish. There simply may not be enough disposal income to make it worthwhile. In either case, insufficient income is the first qualification.

2. Insufficient Nonexempt Assets

Most states allow judgment creditors to go after debtor assets for payment. However, not all assets are on the table. For example, many states prohibit creditors from going after a debtor’s primary residence and household goods.

The states have what they refer to as ‘exempt’ and ‘nonexempt’ assets. Exempt assets are those that creditors cannot touch. Nonexempt assets are those they can. Nonexempt assets would include things like vacation properties, boats, and securities. If a debtor has insufficient nonexempt assets, there may be little available to the creditor. If there is nothing to seize and sell, a creditor could be out of luck.

3. Insufficient Future Prospects

The first two conditions relate to the here and now. Even if both are present, it still might be worthwhile to take a debtor to court. It is the third condition that generally seals the deal: insufficient future prospects. A debtor is not truly judgment proof unless he has no realistic prospects of increasing his income or obtaining nonexempt assets.

A good example of this type of situation would be a middle-aged person who does not own a home and works a minimum wage job. At his age, the likelihood of obtaining valuable assets in the future is pretty slim. The likelihood of him getting a better paying job with sufficient disposable income is not particularly great, either.

So, why does any of this matter? Because courts do not involve themselves in collection efforts. They render judgments on behalf of creditors with legitimate outstanding debts, but creditors are responsible for collecting those debts. It is a waste of time and money to go after judgment-proof debtors who cannot pay.

If you own a small business and you are thinking about civil court as a means of pursuing bad debts, go for it. Just do your due diligence before you proceed. If you’re dealing with judgment proof debtors, going to court may be a waste of time and money. That is just the reality of the situation.

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