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Judgment proof refers to a legal situation in which a person or company may owe a debt, but has no assets that are subject to garnishment or seizure. A person may be judgment proof if he or she is insolvent, or receives income only from protected forms of wages such as pension or Social Security. A business may be deemed safe from judgment if there are no assets or if all assets are in unreachable accounts, such as off-shore investments. Though safety from judgment is generally meant to protect the meager assets of the financially insolvent, it can also be used as a shield against paying out judgements even if enormous assets exist.
For individuals, being judgment proof is normally a consequence of total insolvency. If a person has no assets, they cannot be seized to pay debts, meaning that taking them to court is generally fruitless. While a person can still be sued for debts, if a judgment is awarded, it is effectively negated by the lack of collectible assets. Though this can prevent a person from having to pay a debt, it is generally an unenviable position.
Certain forms of income and accounts are not open to garnishment or seizure in some reasons. Trusts, which are accounts set up to pay for specific expenses, such as a child's future education, are frequently exempt from debt judgements. If using trusts to ward off the potential for debt judgements, it is important to get a lawyer that clearly understands trust law and susceptibility to judgment, as not all forms may be exempt. In many regions, pension payments and disability benefits are exempt, but this may vary depending on applicable laws.
Many judgements against individuals are rendered in the form of wage garnishment. Most regions have laws that say a person must be able to take home a certain minimum percentage of his or her paycheck without fear of garnishment. People that are earning income but want to avoid wage garnishment can sometimes become judgment proof by getting other financial obligations worked into payroll that will push the balance to the minimum legal percentage of take home pay. Some examples of financial obligations that may create this situation include child support and alimony payments that can be taken directly from each paycheck instead of paid at the debtor's discretion.
Corporations and businesses often attempt to build a judgment proof system into the fabric of their financial structure. One of the most common ways to do this is by putting all assets into foreign-based accounts or companies, leaving only debts within the main country of operation. Since courts have an limited area of enforcement, this effectively protects the company from judgment; a state court in Ohio cannot order assets in Switzerland to be seized. By relying on the limits of jurisdiction, companies can thus be turning an enormous profit, yet generally be exempt from any monetary judgements.
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