What if you just ignore your debts?

Involuntary bankruptcy

Failing that, a group of judgment creditors may try to force you into an involuntary bankruptcy. Usually, this is done only when the creditor knows you have valuable assets and wants to have them sold. For example, if you have a home with a large amount of equity and you personally guaranteed the credit card debt that the creditor or collection agency is attempting to enforce, it will want to have that property liquidated. The net proceeds -- after the bankruptcy trustee takes a percentage -- would be distributed to your creditors. This process would also enable the creditor to gain the tax benefit of writing off the debt you owed.

If you have a car, especially one that is paid in full, the creditor's attorney might try to make you surrender the vehicle. I know of an attorney who was trying to collect a debt for his client. He called the debtor into court and asked him whether he had a car. The debtor said yes.

The attorney asked him to go to the car and get documentation to show he owned the car. While the debtor was going to the car, the attorney asked the judge to execute a "turnover order." The judge granted the attorney's request, and when the debtor came back to court, the judge demanded that he turn over the keys to his car. The car was then taken into possession by the sheriff and sold at auction; the net proceeds were credited against the amount of the outstanding judgment. The debtor was left on the curb to find his own way home.

In other words, if you have any assets, any at all, they are at risk. If at any point in this process you have no assets, then your risk decreases. Basically, creditors can't do anything to you if there's nothing for them to take.

Here's what you can do: You can make them wait. Most creditors will sue and get judgments that they can't enforce at that moment because you have nothing to give them. However, these judgments last 10 years and can be renewed twice for a total of 30 years. Now, judgments can fade away over time -- that is to say, collection agencies and creditors have higher-priority things than trying to collect from someone who doesn't have anything. But if you do accumulate some assets or rehabilitate your business, you may find some very happy creditors knocking on your door with enforceable judgments.

So if you plan to re-establish your credit during the next 10 years for any reason, such as getting financing to start another business, you're going to need to make arrangements with your creditors to pay the outstanding debts, or you may need to file for protection in bankruptcy. If you don't need credit, it's not a necessity.

This article was reported and written by Justin Harelik, Bankrate.com's Bankruptcy Adviser.

Updated Nov. 26, 2008

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