What you don’t know CAN hurt you, if it’s a judgment against you by a creditor. Judgments can hurt in three big ways. 1) They enable the creditor to use powerful collection mechanisms against you to collect the debt. 2) A judgment can rush you into filing bankruptcy at a legally disadvantageous time. 3) And under some circumstances a judgment can make it harder to write off the debt in your bankruptcy. I’ll tell you about the first one of these in this blog, and the other two in my next ones.
The vast majority of lawsuits by creditors and collection agencies that are filed to collect their debts end with judgments against the people owing the debts. That’s because the main point of these lawsuits is to establish that the debt is legally owed, which is usually not disputed. Also, much of the time the debtors are at the end of their financial rope and can’t afford to hire an attorney to find out what their options are, much less to defend the lawsuit. So judgments are entered “by default”—meaning the deadline for the debtors to respond passed without any action by them, allowing the creditor to get a judgment. Often debtors are not given any notice that a judgment has been entered against them, so many do not realize that it has, especially when nothing seems to happen for months or even years afterwards. And very few people are fully aware of the possible consequences.
Most people know that a judgment gives a creditor the power to garnish your wages and bank accounts. But preventing garnishments by just keeping your money out of bank accounts and not being paid a regular wage or salary are often not enough to make you “judgment-proof.” For example, a judgment usually becomes a lien against any real estate you own, or will own in the future. That includes not just property under your own name but also your rights to property held jointly with a spouse, parent, or through a trust or estate. An aggressive creditor has a variety of other tools available to it, including getting a judge to order you to go to court to answer questions under oath about what you own. The creditor can get an order to send out a sheriff’s deputy to your home or business to take your possessions to pay the debt. If you are owed money by anyone, that person can be ordered to pay the creditor instead of you. If you own a business, the creditor can force your customers to pay it instead of you, and sometimes can even come to your place of business and take money directly out of the cash register to pay the judgment debt.
I don’t want to give the impression that these kinds of strong-arm collection procedures are used in most cases. But I talk regularly with distressed new clients who have been surprised, and financially hurt, by what a creditor has done to them and their assets.
Beyond the direct damage a creditor with a judgment can do to you before you file your case, such a creditor can cause you very real problems in your subsequent bankruptcy case. I’ll introduce this here and then discuss it more in my next blog.
If you are induced to file bankruptcy quickly to stop an ongoing garnishment or other financially devastating collection activity, you lose one of your most important advantages: the timing of the filing of your bankruptcy case. A lot of what happens in your bankruptcy case turns on precisely when it was filed. Not having the flexibility to pick the best timing can, among other things, turn a hoped-for Chapter 7 case into a Chapter 13 one, can mean a difference of many thousands of dollars, and can generally turn a straightforward case which meets your goals into much more complicated matter.
My entire job can be summarized as helping my clients meet their goals as smoothly and calmly as possible. The lesson here is that, whenever possible, the time to see an attorney—and if you have overall financial problems, specifically a bankruptcy attorney—is right when you get sued. Not after a judgment has been entered and you’ve lost some of your precious power over your own destiny.