The Judgment Proof Debtor: A Creditor’s Biggest Nightmare

It is no secret that businesses need to be careful about extending credit. Every credit offer comes with the risk of not getting paid. The risk is highest when a potential debtor is legitimately judgment proof. So much so that the judgment-proof debtor is actually a creditor’s biggest nightmare.

In short, a judgment proof debtor is a debtor without a legitimate means to pay in the aftermath of a civil judgment entered against them. Having no legitimate means to pay presents a dilemma to the creditor. As they say, you cannot get blood from a stone.

Limited Financial Resources

The telltale sign of a judgment-proof debtor is limited financial resources. Judgment Collectors, a Salt Lake City collection agency that specializes in judgments, says that a lack of financial resources can manifest itself in many ways, including:

• limited employment income
• little or no interest income
• no real property beyond a primary residence
• very few tangible assets of any value
• very few prospects for a better financial future.

Imagine a debtor who works a minimum wage job, doesn’t own a home, and drives a used car. The debtor doesn’t have a retirement account, or any funds invested in stocks or bonds. His most valuable asset is his cell phone. This is the classic image of a judgment-proof debtor.

Going to Court Would Be Fruitless

Judgment proof debtors are especially frustrating to creditors because taking them to court would be fruitless. In civil court, the best a judge can do is render a judgment against the debtor and in favor of the creditor. That judgment is more or less a legal recognition that the debt exists. But it doesn’t go any further than that.

As debt collection agency Judgment Collectors explains, enforcing a judgment is up to the creditor. It is the creditor’s responsibility to figure out how to collect payment from the debtor. But if the debtor has no legitimate means of paying, the creditor has very little recourse. Knowing this in advance, why would a creditor want to take a debtor to court? Why spend the money on civil litigation if there is very little chance of getting paid?

Between a Rock and a Hard Place

Being asked to extend credit to a judgment-proof debtor puts a creditor between a rock and a hard place. Not extending credit might mean losing the sale. On the other hand, extending credit might mean making the sale but never actually getting paid for it. Which is the better situation to be in?

You could argue that losing the sale is the better choice. In terms of a single sale, this is probably true. But just because a debtor is judgment proof does not mean that person will not pay their bill. More often than not, the bill will be paid. So turning away a large volume of sales out of fear of not getting paid on a small number of them can actually cost a company more money in the long run.

A No-Win Situation

In the end, creditors faced with the decision of extending credit to judgment-proof debtors are in a no-win situation. They need to weigh the pros and cons of both choices and go from there. In some cases, not extending credit is the more prudent option. In other cases, though, it would be better to extend credit and take a chance.

Judgment-proof debtors are a creditor’s worst nightmare. They can end up costing a creditor dearly, whether in terms of a lost sale or extending credit on a bill that ultimately will not be paid.