Being judgment proof

When is a client judgment proof?

A client will be judgment proof if their only income is from a Centrelink (or, in most cases, Workcover) payment and they:

• do not own and are not buying a house;
• do not own any assets, for example, savings or jewellery other than:
  • the ordinary household items listed in the warrant to seize property section;
  • one registered car worth less than $7,600;* or
  • tools of trade worth less than $3,700.*

* These amounts change periodically – for the most up to date figures go to the Australian Financial Security Authority.

Section 12 of the Judgment Debt Recovery Act 1984 (Vic) (Judgment Debt Recovery Act) provides that, an instalment order will not (unless the debtor consents) be made if the income of the judgment debtor is derived solely from a pension benefit allowance or other regular payment under the Social Security Act 1947 (Cth) or section 24 of the Children, Youth and Families Act 2005 (Vic).

This means that the client can’t be forced to pay a debt from his or her Centrelink income and has no assets that the creditor can seize.

A creditor may still obtain judgment against the debt, but can’t enforce it.

It’s important that this is pointed out to clients who are judgment proof, so that they can then decide whether to continue paying the debt or whether they should prioritise other debts and expenses such as rent, food and essential services bills.

When and how do you rely on a client being judgment proof?

Keep in mind that for judgment proof clients the best option may be not to pay anything – if a person can’t afford to pay for food and rent (and they don’t have any assets), it may not be appropriate for them to be signed up to a payment plan.

While not paying is not the best option for all judgment proof people, it is the best for a significant number of our clients who are struggling to make ends meet on a day to day basis.

Subject to the client’s instructions, you can point out to the creditor that the client is judgment proof in the course of negotiations.  It is not necessary to expressly use the phrase “judgment proof” at this stage, you can rely on an explanation that your client has no income and no assets and very limited capacity to earn an income in the future.  This judgment proof (negotiation)  template letter relies on the client being judgment proof in this way.

While it is by no means guaranteed, making these circumstances clear to the creditor will make it less likely that the creditor will incur the costs of proceeding to seek judgment in relation to the debt.

Further information on this process is set out under Negotiating with the creditor.

The best outcome for the client will be that the debt will be waived.

It is important that you have discussed the potential consequences of relying on being judgment proof with your client.  It is also important to note that, if the debt collectors persist or the creditor is unwilling to negotiate and proceeds to apply for judgment, this may cause further stress for your client (both financial and emotional). Where the creditor keeps contacting your client, a letter (see below) should be sent to the creditor reiterating that they are judgment proof, have no obligation to pay and therefore any further contact with them in relation to the debt may constitute harassment under section  45(2)(m) of the Australian Consumer Law and Fair Trading Act 2012 (Vic)  (Dealing with Debt Collectors).

If the client continues being contacted by the creditor or debt collector after it has been put on notice that the client is judgment proof, it is worthwhile lodging a complaint with the relevant EDR scheme and the government regulator as such conduct could amount to harassment and coercion. The client may also want to consider bankruptcy as a means of stopping the contact from the creditors and should be referred to a financial counsellor for information about this (refer to Bankruptcy for more information).

Something to keep in mind is that a number of our clients are trying to get things back on track and might therefore give instructions that they would prefer to enter into a payment plan to chip away at the debt. You should also think about your client’s relationship with the relevant creditor – do they need to preserve the relationship or continue to receive the service?

If your client is likely to have no income other than Centrelink for at least the next two years and has no assets to sell, the client may wish to apply for the National Hardship Register.

National Hardship Register

The National Hardship Register alerts participating creditors that persons listed on the Register will be unable to repay their debts. The following organisations participate in the National Hardship Register Program, and have agreed not to contact those listed on the Register:

• ACM Group
• ARL/NCO Group
• Axess Group
• Baycorp
• CCC Financial Services
• Collection House
• Complete Credit Solutions
• Dun & Bradsheet
• Inter Credit
• Lion Finance
• Panthera Finance
• Pioneer Credit
• Shield Mercantile

More information about eligibility requirements and the application process is available on the National Hardship Register website.

Potential consequences of relying on being judgment proof

In the event that negotiation is not successful, the client should be made aware of the following potential consequences of not paying a debt and relying on being judgment proof.

• Interest and costs – the client will incur default interest and enforcement costs (if the creditor does not waive the debt in the course of negotiations).
• Litigation – the creditor can sue the client to recover the debt (although this is less likely if the creditor is made aware that the client is judgment proof). The client will then need to decide whether or not to defend the claim (see Defending a Claim). If the client does not defend the claim and the creditor makes an application for default judgment, judgment will be entered against them (although, again, if the client is judgment proof, this will not be enforceable unless and until the client’s financial circumstances change within 15 years of the judgment being entered). You should advise the client that if he or she defends the claim, they will be liable for increased costs (i.e. the creditor’s costs of enforcement, in addition to the debt itself) if they are unsuccessful.
• Judgment – if the client does not defend the claim, or defends the claim unsuccessfully, and the creditor applies for judgment, the court will order that the debt is owed. This order is enforceable for a period of 15 years and interest will continue to accrue on the judgment debt. The court can (on application by the creditor) order a warrant for seizure and sale (see Judgment Debts). The creditor is less likely to apply for such a warrant if it is made aware that the client is judgment proof because the creditor won’t be able to recoup its enforcement costs from a judgment proof debtor.
• Non-compliance – if the client is judgment proof, they will be unable to comply with any order made by the Court. You should advise the client that the longer term consequences of this could be:
  • default on credit report – a credit report sets out a person’s credit history and debt repayment record, such as defaults. Creditors use this to work out whether they will lend a person money and what interest rates they will charge. A judgment debt will remain on a person’s credit report for five years. Keep in mind that, for a significant number of our clients, their credit report will already have a number of listed defaults and the impact of one more will be very limited;
  • bankruptcy – the creditor can apply to the Federal Court of Australia or the Federal Circuit Court to have the client declared bankrupt. This is unlikely where the creditor is made aware that the client is judgment proof because it’s a costly process for the creditor and they are unlikely to pursue it if they know that they will not recoup anything from the bankruptcy. It may be that your client would like to consider going bankrupt to stop any further contact from the creditor and to ensure the debt is wiped. Refer to Bankruptcy for more information;
  • the debt continues to grow – due to penalty interest accruing on the judgment debt from the date judgment is entered, the debt will continue to grow until such time as the debtor pays it or bankrupts on the debt. Where the judgment debtor is unlikely to ever work again or come into assets, the growing debt may not be a problem. For a young person who is only temporarily out of work or is likely to inherit a property, the fact that the debt increases needs to be seriously considered and bankrupting on the debt may be a better option for them; and
  • (only in very extreme circumstances) jail – it is possible for a court to send a client to jail if he or she ignores a specific direction of the court but this would not happen where the client is judgment proof and not in a position to pay by instalment order. This is very rare (for example, if the client has an instalment order in place and has the ability to pay and the client has persistently and wilfully defaulted on the instalment order without a reasonable excuse) – it is highly unlikely to happen to our client group. Creditors cannot send a person to jail simply because they owe a debt – if the creditor threatens your client in this way, you should consider making a complaint to the Australian Competition and Consumer Commission or Consumer Affairs Victoria (see Debt Collectors and Your Client’s Rights).

If the client’s debt is a secured debt (such as a mortgage over goods or a property), doing nothing in relation to the debt will result in the creditor taking steps to enforce their security, for example, by seizing and selling the relevant asset.

Refer to Secured Debts.