A judgement is the final decision in a civil case that involves one party’s monetary claim against another party. The court’s final judgement establishes liability and damages, the amount of money, if any, that the losing party owes the winning party, allows execution on the judgement pursuant to state law, and begins the accrual of post-judgement interest.
Notably, a final judgement does not require the losing party (the debtor) to affirmatively take action to pay the winning party (the creditor). A creditor can enforce the judgement and use state laws to seize assets in the hands of the debtor or third parties to collect the amount owed. But a final money judgment is not an order compelling the debtor to pay that is punishable by contempt of court or imprisonment.
Understanding how to not pay a judgement requires learning what collection tools are available to the creditor under state law and then structuring one’s assets to make those tools less effective. This process is called asset protection planning.
Asset protection planning can help a judgment debtor avoid paying a civil judgment. Asset protection involves structuring one’s assets in a way that makes it difficult and costly for a judgment holder to collect the judgement.
Asset protection planning can help a judgment debtor avoid paying a civil judgment. Asset protection involves structuring one’s assets in a way that makes it difficult and costly for a judgment holder to actually collect on the judgement.
There are four main ways to not pay a judgment: (1) use statutory exemptions, (2) use protected assets, (3) negotiate with the creditor, or (4) file bankruptcy.
1. Statutory Exemptions
Florida law makes various types of property exempt from execution. Most statutory exemptions are found in Chapter 222 of the Florida statutes. Taking advantage of these exemptions can help a judgment debtor not pay a judgment.
Some of the most important exemptions include the Florida homestead exemption, retirement accounts, tenants by entireties property, head of household earnings, and social security income.
In Florida, a person’s home is truly one’s castle. The Florida homestead exemption protects a person’s primary residence from judgement liens or forced sale to satisfy a judgment.
For the homestead exemption to apply, the judgement debtor must occupy and reside in the home with the intent to maintain a permanent residence.
The homestead exemption is of unlimited value. However, the protection is limited to one-half of an acre if the homestead property is located inside the city limits, but 160 acres if in an unincorporated area of the county.
Under 222.21 of the Florida statutes, most retirement accounts are exempt from creditors. The account must be maintained under specific IRS code sections. These sections include IRC 401(a), 403(a), 403(b), 408, 408A, 409, 414, 457(b), and 501(a).
The code sections include IRAs, inherited IRAs, Roth IRAs, and 401k. Pensions and 401k accounts are also protected under Federal law.
Self-directed IRAs are sometimes protected depending upon the plan documents and how the IRA is run.
Tenants by Entireties
In Florida, property acquired jointly by a married couple is in most cases presumed to be held as tenants by entireties. Tenants by entireties is a form of joint ownership that is fully exempt from the debts of a single spouse. Properly using the tenants by entireties exemption is a simple, yet effective way to avoid paying a civil judgment.
A creditor cannot force a judgment debtor to pay a judgment using tenants by entireties property.
Care is required to create a tenancy by the entireties with some forms of personal property. For example, opening a brokerage account or a bank account as tenants by the entireties involves rules for the account signature card. Vehicles can be owned as tenants by entireties, but the title must include list ownership as husband “and” wife.
Head of Household Earnings
The earnings of someone who is head of household, or head of the family, are fully exempt from collection and wage garnishment. A person can avoid paying a civil judgement with their earnings if they qualify as the head of household.
The Florida statute defines earnings as wages, salary, commission, or bonus. Other types of earnings for labor have been held to also qualify for the head of household exemption. Passive income, such as LLC distributions, does not qualify for the head of household exemption if the debtor is the sole owner of the company and even if they pay employment tax on the distribution.
The head of household exemption can be claimed during a wage garnishment proceeding.
Social Security Income
Under Federal law, social security income cannot be taken by a judgment creditor to pay a judgement. There is no civil procedure for the judgement creditor to garnish the social security income before it is deposited into a bank account.
Once the funds are deposited, they are almost always still protected so long as they are clearly identifiable and traceable as social security money. Some courts have limited the exemption to social security funds reasonably required for the debtor’s financial support.
2. Using Protected Assets
Some assets are not exempt under Florida or Federal statutes but are nevertheless effective in helping a debtor not pay a judgement. The most commonly used assets to help not pay a judgement are (1) multi-member business interests and (2) protected bank accounts.
Multi-member LLCs and Partnerships
In Florida, the exclusive remedy of a judgement creditor against a debtor’s membership interest in a multi-member LLC or partnership is a charging lien. A charging lien is a creditor’s lien on the profits distributed from the company to the judgement debtor.
If the LLC or partnership chooses not to make any distributions, then nothing is paid to the creditor because of the lien. For this reason, charging liens are an unproductive creditor remedy.
Multi-member LLCs have at least two members. The ownership does not need to be equal. For example, an LLC that is owned 95% by the judgement debtor and 5% by another person is still a multi-member LLC.
Protected Bank Accounts
A few states have enacted laws to protect bank accounts from judgement creditors. These laws sometimes protect wages deposited in the accounts, while other states completely prohibit garnishments directed towards the banks.
Depositing funds in these protected bank accounts can further help a person to avoid paying the civil judgement.
3. Negotiate with the Creditor
A civil claim for damages remains open for negotiation, whether before or after the judgement is rendered. Effective asset protection can substantially increase the debtor’s negotiating position. A creditor continuously evaluates whether it is worth its time, expense, and risk in trying to undo and pierce your asset protection structure.
Many creditors would rather take a sure thing (a settlement amount) than gamble on being able to collect more from the well-protected judgement debtor.
Often the best time to negotiate is after defeating the judgment holder’s initial attempts to collect on the judgement. For example, suppose a creditor attempts a wage garnishment. The judgement debtor files a claim exemption claiming the head of household exemption. The garnishment is dissolved after a hearing on the exemption. The dissolution of the garnishment is an opportune time for the debtor to make a settlement offer.
4. File Bankruptcy
If all else fails, a person can avoid paying a judgement by filing for Chapter 7 bankruptcy. Chapter 7 bankruptcy enables a debtor to discharge all their unsecured debt, including monetary judgements.
The bankruptcy debtor must in exchange turn over to the bankruptcy trustee all their non-exempt assets. Bankruptcy trustees also have more tools to collect judgments than do judgment creditors in state court proceedings.
FAQs About Not Paying Judgements
Here are some frequently asked questions about how not to pay for judgements.
Can you negotiate after a judgement?
A person can always negotiate after a judgement. With a strong asset protection structure, debtors often will negotiate a large reduction of the judgment’s face value.
How do you get around a judgement?
To get around a judgement, a debtor can structure their assets and income to take advantage of state and federal law protections. If the collection tools available to a judgement creditor are ineffective, then a debtor will have an easier time avoiding the judgement or reaching a settlement.
What percentage should you offer to settle a debt?
You should initially offer no less than 10% of the judgement value to settle. Ultimately, the percentage that you pay to settle a debt depends on the age of the debt and the effectiveness of your asset protection. To the extent you convince a creditor that its judgement is uncollectible, the creditor is likely to accept a lower percentage in settlement negotiations.
What happens after a judgement is entered against you?
After a judgment is entered against you, the judgement holder can use creditor collection tools provided by state law to seize or levy on any assets in your name, or debts owed to you, that are not exempt from execution.