After a debt judgment, inheritance may be at risk

Collectors may sue, depending on state laws

To Her Credit columnist Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs.

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Question for the expert Dear To Her Credit,
I was recently served with a credit card debt judgment from the sheriff. I understand this will create a judgment at the county courthouse. If in the future I inherit cash, bonds or a house, will the credit card company take my inheritance before I can receive it? -- Susan

Answer for the expert

Dear Susan,
It's possible, but by no means automatic or guaranteed. The answer depends on the laws in your state. San Francisco bankruptcy attorney Jeena Cho says, "In most states, creditors would be able to record liens on any property acquired after the judgment. Although unlikely, the creditor can then proceed to foreclose to collect on the judgment."

That's why it's so important to deal with debts, rather than let the legal system run its course. Creditors can pursue your assets as quickly as they discover them. It's not just future inheritances of yours that are at risk. Creditors can garnish wages, bank accounts or even lottery winnings, if you are so lucky.

Judgments eventually expire, but not anytime soon. "Judgments can last for a long time. In California, it's 10 years," says Cho.

If you owe a lot of money, don't bank on the judgment expiring at the end of the judgment time period for your state, either. The creditor can renew the judgment. Cho says the likelihood of that happening depends mainly on the amount of debt and what the creditor perceives as his likelihood of collecting. Don't forget that the debt will continue to grow while the creditor is waiting for a chance to collect, which only makes collecting on the debt more worth the creditor's while.

The best thing you can do, according to Cho, is to try and settle the debt. Creditors would rather get something than nothing. Follow the steps in this tutorial to try to settle your debt. You can do it yourself. In fact, you may have better luck settling with the creditor yourself than using a settlement company. Plus, you'll save on fees.

Don't forget that debt settlement will affect your credit score. You will probably also owe tax on any amount forgiven by the credit card company.

If you have significant debt that you have no way of settling or paying off, you may want to consider bankruptcy. Bankruptcy is the most viable solution when you have debt as a result of a one-time disaster, such as catastrophic illness, long-term unemployment, a business failure or a divorce. Bankruptcy can wipe the slate clean (or almost clean -- some debts may remain), so you can start over.

Bankruptcy is a temporary patch, at best, for people who simply make less money than they spend. For too many people, that fresh start is just a chance to start over accumulating debts they can't pay. After bankruptcy, they'll get credit. However, they pay higher interest rates, so they often get further into debt again, only faster.

One unresolved debt is usually part of a larger financial problem. A credit counseling organization can help you look at the big picture and see all your options. I recommend finding a nonprofit agency affiliated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies.

In 10 years, your finances could change dramatically. That's enough time for a person to go to college and start a career, for example, or to get married. Don't leave a debt hanging over your head for that long. Take steps to resolve it as soon as possible, and take care of your credit!

See related: Debt settlement industry in flux as new rules start, Can collectors come after your inheritance?, Is inheritance at risk with bankruptcy filing?

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Updated: 01-23-2018