Post-Judgment Debt: What you Need to Know
If a creditor has taken you to court for an unsecured debt and won the case, you now have a judgment filed against you and an important obligation you need to deal with. While you can’t change the past, you can improve the future. There are steps you can take to reduce the burden of a judgment and improve your credit standing.
How a judgment creditor can collect
A judge may grant the creditor that sued you (called the judgment creditor) the ability to collect in a number of ways. Collection action depends on state law, but may include a:
- Wage garnishment
This is when a portion of your paycheck is automatically deducted and sent to the judgment creditor until the debt is satisfied. Federal law allows for a maximum garnishment of 25 percent (or more if the debt is for child support or alimony) of an employee’s net wages, though some states allow less and others prohibit this method altogether.
If you own real property, such as a home or a car, the judgment creditor may record a lien against it, which will have to be paid when you sell or refinance your property. Sometimes a judge allows a judgment creditor to force the lien, meaning you would have to sell the property and pay the creditor from the proceeds of the sale.
In some cases, a judgment creditor may be allowed to take cash from checking, savings, or other deposit accounts to satisfy the judgment. This is called a levy. Or they may levy your personal property and sell it at auction, with the proceeds going toward the outstanding debt.
Depending on the state you live in, the judgment creditor many have many years to take collection action, and can usually renew the order for another span of time without having to sue you again.
Options for handling a post-judgment debt
After the lawsuit you may be surprised to find that the amount of the judgment is far higher than the original debt. This is because court and attorneys fees were added to the balance. Many states also allow the creditor to charge post-judgment interest as well. Because the debt can be large and the collection action severe, know the various methods for handling a judgment and choose the option that makes the most sense for you.
- Pay in full
You can, of course, pay the debt off at any time. To pay, use a personal check, money order, or cahier’s check. If you must pay with cash, be sure to get a receipt. Once you have paid the total balance, obtain a Satisfaction and Release of Judgment form from the court or the court’s website. Have the judgment creditor sign it, make and keep a copy of the completed form for your records and file the form with the court. If the creditor has placed a lien on your property, they will lift it when you satisfy the judgment. You can also save your property from a levy if you are able to come up with the money before your assets are seized.
- Offer an installment plan
For judgments too large for you to pay in full, you may be able to pay in regular installment payments. Determine the amount you have to pay the judgment on a monthly basis. Be conservative – never offer more than you can really afford. Put your payment plan in writing and ask the judgment creditor to agree to it. If you can persuade them to take your offer, you may be able to avoid a garnishment or other collection methods.
- Pay via the garnishments
If your wages are being garnished, you can leave the situation as it is and have the debt run its course. Eventually, you will repay the balance this way. However, if the payment is causing a tremendous strain on your finances, you may be able to modify the garnishment by filing a claim of exemption. You would usually do this when your employer first presents you with the earnings withholding order, though you can file the paperwork at any time. The information and instructions for filing a claim of exemption are on the earnings withholding order. If your claim of exemption is accepted, you will receive a modified order.
In case you are concerned that you will lose your job because of the garnishment, know that the Consumer Credit Protection Act protects you from being fired if your wages are garnished for one debt. However, it does not protect you if your earnings are subject to garnishment again.
Handling a post-judgment debt swiftly and appropriately is important. While you have fewer ways to resolve the situation than you did before the lawsuit, you do have options. Choose carefully and begin to rebuild your finances.
Revised January 2016.