Why You Should Know What “Judgement-Proof” Means

For some reason, non-lawyers rarely know what “judgment-proof” means. On the other hand, most attorneys are all too familiar with the term. The following article explains what “judgment-proof” means and explains why understanding the term is important for landlords and property managers.

Simply stated, “Judgment-proof” is the term used to describe a person from whom it costs more to collect than you are ever going to get. In other words, trying to collect a debt from a judgment-proof person is virtually always a waste of money and effort because this person doesn’t have sufficient property to satisfy a judgement.

A significant percentage of Montanans are judgment-proof. There are many reasons for this. Most of the reasons stem from the historical fact that in the United States we tend to protect a person from creditors if his income or assets fall below certain levels. There are many ways that both our federal and state laws protect poor people from creditors. Here are some examples of ways our state and federal governments protect poor people from creditors:

  1. Availability of federal bankruptcy protections, reorganization and discharge;
  2. State protection from seizure for most of a person’s regular income;
  3. State protection of ALL retirement funds and/or social security income and/or disability income;
  4. Homestead exemptions for homeowners;
  5. Statutes protecting some of a person’s basic assets from seizure (see MCA 25-13-608 and 25-13-609);

It’s important that landlords and property managers understand that these and other protections exist for poor people. Because landlords and property managers own or operate rental property, their renters, especially their residential renters, are virtually always judgment-proof because residential renters generally are not property owners.

There is a quick test you can perform to help determine if someone is judgment-proof. Obviously, if you ever think about suing somebody for money, before you spend a whole bunch of money on an attorney, you might want to use this test to see if your potential defendant is worth suing. Keep in mind that this article is about the viability of money lawsuits. Eviction lawsuits are different. If you have someone you don’t want in your property, then you often have to get them out. Generally, the above-listed protections won’t interfere with the part of an eviction lawsuit that applies to regaining possession of the property.

QUICK THREE STEP TEST TO SEE IF SOMEONE IS JUDGMENT-PROOF

1. Does the person own real estate?

This test is pretty easy. Simply go to http://svc.mt.gov/msl/mtcadastral/ and do a property ownership search in every Montana county where you think the person might have lived.

This is important because when you sue somebody and win, your money judgment is automatically a lien against any real property owned by that person in the county where you have judgment. Actually, it’s only a lien if it’s a District Court Judgment. (However, if you get a judgment in Justice Court, it’s pretty easy to move your judgment to District Court.) These liens are very similar to loans secured by real property. Your judgment earns interest at the statutory rate. Currently (12/14), the statutory rate is 10%. If your judgment debtor has significant equity in his property, your judgment might be a pretty good investment.

When a judgment debtor tries to sell his real property, the lien shows up on the title insurance commitment. Banks usually won’t lend on the property unless the lien is satisfied. Also, any buyer will usually refuse to close unless the seller first satisfies the lien. Either way, you’re likely to get your money plus interest.

The problem, of course, is that renters, especially residential renters, almost never own real property. If they owned real property, they probably wouldn’t be renting.

2. Does the person have a job that he can’t afford to quit?

Even if a judgment debtor doesn’t own real estate, you can sometimes have a process server seize part of your judgment debtor’s wages each pay period. This process is called garnishing.

The problem with this method is twofold. First, you can only garnish 25% of the person’s wages each pay period. Often when you attempt to garnish, you find that half the town is already ahead of you trying to garnish the same person. Strangely, deadbeats are usually quite consistent. You probably aren’t the only one getting stiffed. Second, when you garnish a low-paid wage earner, the wage earner will often immediately quit and find a new job. Most employers who employ large numbers of low paid workers are quite used to employees being garnished. They’re also used to employees playing musical chairs with their jobs.

Example of jobs that a judgment debtor can’t afford to quit are seniority-based jobs like union jobs and other well paid positions.

3. Check the various courts in your area for extant judgments against the defendant.

This one is self-explanatory. You simply go to both the justice and district courts in the counties where your debtor has been living. Ask the clerk for a list of judgments against the debtor. The clerk will probably require payment. If the debtor has unsatisfied judgments, then you might ask yourself why you think you’re going to get lucky.

I’ve been doing evictions for a long time. The overwhelming majority of evictions are for nonpayment of rent. From what I’ve seen, tenants you evict are virtually always judgment-proof. In business, you choose what to invest your money in and you choose what to invest your time in. Unless you have some specific reason to think your tenant is not judgment-proof, you should probably think about not bothering with the above tests. Your time is probably better spent on other chores that are more likely to result in profit. I’ve included the tests because some inexperienced landlords have trouble letting go of their hopes to recover back rent. More experienced landlords typically don’t bother with this test. They simply evict, rehab the unit and try to get better renters.

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