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How to Tell the Debt Collector You are Judgment Proof

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How Ability to Pay Affects Debt Defense

Bankruptcy – what it is and how it works

When people are being sued for debts, they often panic and look for the quickest, easiest, or least scary way out. Bankruptcy sometimes seems to be that way. What is bankruptcy? and how does it work? How does it affect some of your other rights?

What Bankruptcy is

Most people have an intuitive idea of what bankruptcy is – legal protection for people who are broke, right?

Sort of.

Bankruptcy is at least equally a protection for creditors. You see, when people are financially troubled, this doesn’t mean that they literally have NOTHING. Rather, they will spend or distribute an inadequate number of resourses in a way to relieve them of the most pressure, or to favor people they want to favor. Bankruptcy exists to help prioritize and organize the ways debtors distribute their money so as to protect the creditors from favoritism or sneaky behavior. It does protect the debtor (person declaring bankruptcy) from all lawsuits or judgments, and this in turn spares the creditors from having to “race to the courthouse” to file suits against the financially weakened.

That makes good sense, right? So shouldn’t anybody with debt troubles dive into bankruptcy?

Price of Bankruptcy

Bankruptcy is not a “free lunch” to debtors. It can be expensive to do, and over the past decade or two has been made much trickier to get in and finish. It is also extremely intrusive and occasionally time-consuming. It also does not protect you from all claims, notably those associated with “secured” debts – debts like home and auto loans.

In my opinion, bankruptcy is RARELY a good first option for people being sued for debts, especially if they’re being sued by debt collectors. On the other hand, if you expect to negotiate with a debt collector or creditor in any way, our position is that you should consult a bankruptcy lawyer. You should know what it costs and requires, and letting a debt collector know you’ve actually talked to a bankruptcy lawyer can have a wonderful effect on their willingness to accept lower amounts of money.

Issues in Bankruptcy

Perhaps surprisingly, bankruptcy and debt law are not closely related, and lawyers who practice one kind of law rarely know much about the other. Unless your lawyer (if you have one) actually practices both types of law, he or she is probably not qualified to give you advice about the area in which he does NOT regularly practice.

Bankruptcy and FDCPA

Another issue comes from the interaction of bankruptcy and debt laws. This isn’t uniform, consistent, or particularly fair. In some jurisdictions, for example, if you declare bankruptcy, creditors will come out of the woodwork to file “claims” against the bankruptcy estate. It would be illegal for them to sue you, but in SOME courts it’s fine for them to litigate against you in bankruptcy. This is plan stupid and bad, but some federal appeals courts allow it while others make it a violation of the Fair Debt Collection Practices Act (FDCPA). The Supreme Court has not addressed the issue yet.

Bankruptcy and Student Debt

The courts are even less consistent or fair when it comes to student debt. If most of your debt problem comes from heavy student loans, bankruptcy may not offer you much help. They are treated differently from almost all other debts, and in many courts they are almost impossible to shake off. Strangely, perhaps, this issue has not been organized or even considered very much by bankruptcy or debt lawyers. I have addressed the issue in Getting Out of the Trap of Student Loans. That book discusses the way bankruptcy law and student loans collide and, on a federal circuit by circuit basis, what your chances of escaping the trap might be.

Against Debt Collectors

Our view on suits brought by debt collectors is that bankruptcy is rarely a good first option – and only sometimes a good last option. However, you should know that, if bankruptcy will work for you at all, it will work for you just about as well even if the debt collector has obtained a judgment. That is, bankruptcy protection applies to state court judgments as much as any other kind of debt, alleged or proven. Thus you could defend yourself pro se and, if you lost (as very few of our members do), you would still be able to declare bankruptcy if it would help.

Garnishment and other collection methods

Garnishment of Assets – Can they Take your Wages or Bank Account?

Can your wages be garnished by a debt collector? What about bank accounts? Here are some things you need to know about garnishment.

If you have assets, and this includes either a job or money in the bank, you must be concerned about the possibility of being garnished if a debt collector (or anybody else) has a judgment against you.

Bank Accounts

Bank accounts can be garnished and, when they are, it is almost always a surprise to the debtor. What typically happens is collectors obtain money judgments (usually by default) and then use the judgment to freeze the funds in your bank account. State law and banking rules govern how the bank must handle the garnishment process. Collectors always notify the bank first and then notify the debtor. This way your funds are frozen before you can take any action such as withdrawing all your funds.

Their notifying the bank first is perfectly legal. You typically receive the notice (including your rights) a day or two after your funds have been frozen. In most states, the garnishment can not only freeze funds already in your account at the time of service on the financial institution, but can also reach funds that get put in the bank afterward, for a time.

During the time the garnishment is in effect, the financial institution will not honor checks or other orders for the payment of money drawn against your account. This means any outstanding checks will more than likely bounce or be returned for NSF. The exception to this rule is if your account has more on deposit than the amount of the garnishment. In this case, the bank can honor checks up to the amount that will reduce your funds below the amount of the garnishment. When the amount being garnished is paid, the freeze on your account must be terminated.


Wages can also be garnished, and, again, your first notice that you are being garnished is likely to be when you receive a check that is less than you thought it would be. Federal law limits the maximum amount that can be garnished by one or more garnishment orders to 25 percent of your disposable earnings for that week, or the amount by which disposable earnings for that week exceed thirty times the Federal minimum hourly wage, whichever is less. In simple terms, “disposable income” is whatever money you have left after paying all required taxes and national insurances!

Disposable income is after-tax income that is officially calculated as the difference between personal income and personal tax and nontax payments. In general terms, personal tax and nontax payments are about 15% of personal income, which makes disposable personal income about 85% of personal income.

IMPORTANT: In order for wages to be garnished, disposable earnings per week must exceed thirty times the federal minimum hourly wage or $154.50. Put another way, if you make $154.50 or less per week your wages cannot be garnished – for now and as long as you don’t make any more than that. Also – Social Security and some other types of disability or retirement income are protected from collection.

There are also important state rules regarding garnishment, and if you are garnished, or if you bank account is seized (especially), your first move should be to look at the state laws on garnishment and see if an exemption applies to you. They often will.

But You Should Not Let them Get a Judgment

All of the above being said, you will almost always be much better off it you can avoid letting them get a judgment against you. Things could get better for you in any number of ways. Just because things seem bleak now doesn’t mean that the sun won’t eventually shine. And it isn’t all that hard to keep them from getting a judgment if you know what you’re doing.

If you want help fighting the debt collectors, you should consider our new FastTrack Membership. Go here for more information on debt collection and defense, and how we can help you. We can also help you overcome a default judgment.