Collection-Proof

What Is Collection-Proof?

"Collection-proof" is a term to describe a person who has no income or assets that can legally be seized for debt repayment. In essence, the debtor doesn't have any assets that a creditor can collect after a court requires the debtor to pay. A creditor who obtains a judgment can attempt to garnish a debtor's wages, levy their bank account, seize their vehicle, or place a lien against their real estate, but none of these efforts will succeed if the debtor is collection proof and doesn't have these assets or income.

Understanding Collection-Proof

Collection-proof describes a situation where a person's assets or income cannot be seized by a creditor or agency for debt repayment. Certain types of income are collection-proof. This includes income from Social Security and Social Security Disability, veteran's benefits, unemployment compensation, worker's compensation, child support, and welfare payments. 

A certain amount of money from these protected sources that a debtor already has in a bank account at the time of the judgment is also protected under certain conditions.

In addition, if the debtor’s wages are too low, they cannot be garnished at all. For example, in California, a debtor with $2,080 in monthly disposable earnings is protected from wage garnishment as of 2020.

Special Considerations

Certain assets may also be collection-proof, depending on the debtor's state of residence and type of debt. For example, a primary residence, up to a certain value, often cannot be seized and sold to repay a debt. Vehicles may be protected, as well as a limited amount of personal property, business property, and household goods.

The rules regarding what income and assets are protected contain numerous complexities that can make a seemingly protected item collectible, however. An attorney or a consumer advocacy group can help collection-proof debtors decipher the rules and how they apply to their unique circumstances.

The length of time a judgment is valid varies by state. In Nevada, for example, it is six years. The judgment won't necessarily go away at the end of that period as the creditor may try to renew it.

In other words, being collection-proof at the time a judgment is handed down does not mean a debtor will never have to repay the amount owed. As soon as the debtor's financial situation improves, the creditor may be able to start collecting, and the amount owed may continue to accrue interest for as long as it remains unpaid.

Example of Collection-Proof

Mark works in a job that barely pays him above minimum wage salary. He is diagnosed with a serious illness one day. Luckily, it is still in its early stages. Since he does not have health insurance, Mark uses his credit card to pay off his medical bills. In the process, he runs up a huge credit card debt. When the agency comes calling for payments, Mark is unable to service the debt. Mark lives in Nevada, where one can be declared collection proof for six years.

The credit card agency files a case against Mark. Mark ignores the summons and is declared collection-proof for six years. At the end of that term period, the case is filed again. By now, Mark has moved up in life and has a better job that enables him to own assets. Although he applies to become collection-proof again, Mark's application is rejected and he is required to service his credit card debt along with interest payments.