Default judgments occur when the named defendant in a civil suit fails to file an Answer to the Summons and Complaint served upon him or her. In most civil suits, like actions for the recovery of a debt, the defendant has 20 or 30 days to file a response. If the defendant does not answer, then the plaintiff, or party who initiated the lawsuit, can request a default judgment from the court for the amount the defendant was alleged to have owed. A party can also ask for a default judgment if the other party fails to appear in court or to file any other material document.
Are your personal finances affected by a default judgment? If the lawsuit was against you personally, then some of those assets are vulnerable to seizure by the judgment creditor. One exception is a suit against a corporate entity or LLC where your personal assets are protected unless the plaintiff can demonstrate that the directors and officers of the corporation or LLC failed to follow corporate formalities. This would include co-mingling of personal and corporate funds or presenting evidence that the corporation did not act as one, exposing the assets of the officers and directors to seizure.
The major effect a default judgment has on your finances is that it lowers your credit score along with the annoying fact that the judgment remains on your credit record for 7 years. Also, the judgment is good for 10 years, meaning that the judgment-creditor has a decade to try and collect on the debt. When the 10-year period expires, however, the judgment-creditor can renew the judgment for another 10 years.
Collecting on the Judgment
When a money judgment is entered against you, some of your personal assets are at risk. A creditor may subpoena you to appear at the courthouse for deposition to ask you questions, under oath, regarding your bank accounts, stock interests, vehicles, real property and any other personal property. You will have to disclose information about your employment and your wages or salary. If you refuse to answer, the attorney deposing you can immediately seek a judge’s order compelling you to answer or you can be held in contempt.
Once the judgment creditor has an idea of what your assets are, then those assets may be at risk of being seized or levied on. These include:
- Bank accounts
- Wages or salary
- Real property
- Funds withdrawn from an IRA or 401(k)
- Retirement plans from your own business
The creditor can employ measures to get at your bank accounts by levy and your wages by garnishment. Though your primary household has some protection, depending on your state, second homes or real property that is not your homestead is not protected. If you have large personal possessions like a boat that is not secured, it is also vulnerable unless it is your home.
Assets that are Protected
You do have some protection from creditors, though. In California, the equity in your home is exempt from creditors’ claims in the amount of $75,000 if single and $100,000 for a family. Larger exemptions apply based on age, disability and income.
There are exemptions for one motor vehicle, tools of the trade and public benefits as well as other items of personal property. Funds in your IRA and 401(k) are exempt from the reach of creditors under the Employee Retirement Income Security Act unless or until you withdraw those funds. Also, any property you have in a trust is protected as it is owned by the trust and not you.
If you are concerned about your assets being seized following a default judgment, immediately seek the advice of an attorney. Options include a motion to set aside the judgment based on inadequate process of service of the Summons and Complaint on you or that your failure to file an Answer or to appear in court was the result of inadvertence, mistake or excusable neglect. If the judgment is sizable and setting aside the judgment fails, you may consider negotiating a settlement with the creditor or filing for bankruptcy under either Chapter 7 or 13. Seek legal advice on whether this is a viable option for you.