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DEBT COLLECTION: THE
TOOLS AVAILABLE FOR ENFORCEMENT OF A JUDGMENT
Introduction:
Someone owes you
money or breached a contract. Someone defrauded you or caused you damage
due to negligence or greed. You have filed suit as described in our
article on
American Litigation or commenced arbitration as described
in our article on
Arbitration.
After presenting your case you were awarded a judgment in your favor.
Now what?
You have a piece of
paper that looks quite impressive awarding you monetary damages and
perhaps costs and attorneys fees. You feel vindicated and you want your
money. You send it to the opposing party and, instead of paying it, they
either ignore you or still refuse to pay.
This article shall
outline your next steps in actually collecting the judgment from the
defendant who refuses to pay. Or, as a client put it, “Changing a piece
of paper that I can wave in the air to a piece of paper I can put in the
bank…namely, cash.”
The Judgment:
In the case of a
verdict in Court, the award is reduced to a written document entitled a
“judgment.” In the case of an arbitration award, the award of the
arbitrator, to be enforceable, must be entered in a court of law after a
formal petition filed in court to enter judgment of the arbitrator with
the Court then scheduling a hearing to determine the validity of the
award. Since the courts routinely enforce awards of arbitrators, this
procedure is usually pro forma though it can be contested. The grounds
for overruling an arbitrator’s award are extremely limited in California
and normally, within sixty days of filing the petition to confirm the
award of the arbitrator, it is reduced to a court judgment by the judge.
A judgment is more
than a piece of paper. It allows the party holding it to utilize the
Courts to directly seize assets of the judgment debtor whether they are
cash or realty. It can be entered in foreign locales, if necessary, and
is usually good for at least ten years and can be renewed to remain in
force for much longer. It accrues interest at rates varying depending on
the jurisdiction, but usually at seven percent and often at ten percent.
The interest can be added to the underlying judgment and earn interest
on itself. Usually, the interest will double the size of the judgment
every seven years or so.
Our office has
collected on judgments in months…and in some cases, when the judgment
debtor appeared destitute, waited over ten years and collected in full,
with interest, at that time.
It is a very
powerful tool if utilized correctly and if all the powers it contains
are carefully analyzed and utilized in concert as necessary. If utilized
without forethought, it can often result in failure to collect as
debtors move assets outside the reach of the various tools available to
the judgment debtor.
It is as important
to plan implementation of the collection process as it was to plan
preparation of the case.
The Tools of Collection:
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THE WRIT OF
EXECUTION.
Once one has a
judgment, one has the power to ask the Court to issue a Writ of
Execution which allows the Sheriff of the county in which
property is located to:
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Seize bank accounts of any type including checking and savings.
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Seize wages.
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Seize any hard assets that can be found (e.g. equipment, tools,
machinery, etc. This would also include automobiles, trucks,
paintings, jewelry, etc.)
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Seize stocks, bonds, certificates of deposit, etc. or other types
of ownership rights both of publicly traded companies and even of
companies owned and run by the judgment debtor. It can also allow
seizing of leasehold rights, e.g. the lease of the judgment debtor.
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To seize debts owed to the judgment debtor (e.g. to get the debtor
of the judgment debtor to make all payments to you rather than your
judgment debtor.)
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One can have the Sheriff enter the business premises of an ongoing
business and seize its various assets and literally stand at the
cash register and take money that the customers are paying to the
judgment debtor. And, at the end of the day, seize the cash
register, itself.
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And, in general, seize any asset of value owned by the judgment
debtor that the law does not exempt from execution. (Most states
allow the judgment debtor to retain certain minimum assets such as a
bed, desk, chair, etc.)
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THE
ABSTRACT OF JUDGMENT.
Real property owned
by the judgment debtor may also be seized. In this respect, a document
called an “abstract of judgment” is filed in the County
Recorder’s office and acts as an automatic lien against any property
owned by the debtor within the county. Note that this is not state
wide…only property within a single county is liened. Thus, often
judgment creditors will record Abstracts in two or more counties,
usually those in which the debtor lives or does business.
One does not even
have to know if there is property owned by the debtor in the
county…merely by recording the Abstract, one has an automatic lien
against any such property, even if acquired after the abstract is
recorded.
Normally, title
insurance companies will not allow the debtor to sell or even borrow on
the property without paying off all Abstracts of Judgment and this is a
typical way for a creditor, long, long after the Abstract is recorded,
to be paid. This office has received calls from Title Companies asking
how much is needed to pay off our client’s Abstract as much as fifteen
years after recorded. As one client put it, “it is a time bomb waiting
for the defendant to buy some property some time in the future…”
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THE ORDER OF
EXAMINATION.
The judgment
creditor, of course, wishes to locate the assets of the judgment debtor
so they can be attached. The judgment debtor is not likely to make that
easy and will probably attempt to both hide assets and transfer them to
third parties.
A judgment creditor
is allowed to file in the Court a request for an Order of Examination by
which a judgment debtor is ordered to the Court to answer questions
under oath as to the location of assets and failure to appear can result
in a warrant for the arrest of the judgment debtor-probably the only
instance of “debtor’s prison” still left for an American citizen. Once
the judgment debtor answers under oath as to the location of assets, the
creditor can ask the Court to order the debtor not to move the assets
and seek a write of execution on the spot.
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TRANSFERS TO
DEFRAUD CREDITORS.
A typical reaction
of a debtor who knows attempts at debt collection is coming his way is
to transfer assets into the name of friends or relatives. However,
unless fair market value is paid for the transfers (in which case the
debtor must account for what happened to the money) the transferee can
end up as a defendant in another legal action brought by the creditor,
namely a claim that the transfer was one to defraud creditors. The
transferee can end up not only having to pay the costs of defense, but
will have to transfer to the creditor the full value of what was
transferred. Often debtors end up involving friends and family in very
acrimonious litigation and more than one family has fallen apart as
relatives were dragged into bitter litigation.
THE GAME: FINDING THE
ASSETS BEFORE THEY DISAPPEAR.
It requires calm and
careful planning to achieve successful collection in most cases.
Ideally, one wants to obtain the Writ of Execution and seize assets
before the judgment debtor has a chance to realize the assets have been
found and move them. Also, other creditors may be chasing the same
assets and if the assets are finite, the other creditors can be more of
a problem than the judgment debtor.
The usual steps are:
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Retaining a
special investigator to locate assets.
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Obtaining Writs
of execution secretly and delivering them to the Sheriff to serve.
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Seizing the
asset or garnishing the wages before the debtor even knows the
collection effort is on the way.
Debtors often are
extremely alert for the first few months after the trial but have a
habit of relaxing as the months go by. It is common for a clever
judgment creditor to hold off all collection efforts for months, even
years, then suddenly attach assets to the shock of the debtor.
Thus timing becomes
critical. If the debtor knows you are actively seeking to collect, the
bank accounts known to you will be changed before you can get to the
Sheriff with the information. Often a creditor will have a colleague
sell some products to a judgment debtor, get the banking information
from his payment-then seize the account.
Such tactics are
myriad and require careful implementation. But, as one debtor once told
this writer, “the hassle of always worrying about you guys looking over
my shoulder was worse than just paying the judgment. It’s a relief. I
don’t have to worry about my accounts suddenly being seized.
RESTRICTIONS ON
COLLECTIONS
Every state has
certain restrictions on assets that can be seized and the usual ones
confronted are garnishing wages (all States only allow a certain
percentage to be seized at a time so that the garnishee has enough to
live on) and selling a family residence (most States allow the family to
retain a residence if the equity is below a certain amount and require a
full hearing before the family home can be seized unless there is a Deed
of Trust involved.)
While the various
restrictions must be carefully noted, it has been our experience that
they seldom stop effective collection assuming a debtor has any
significant assets. The restrictions normally protect the debtor already
close to insolvency and those are seldom worth pursuing in any event.
Recall that taxes take precedence over private debts thus a truly
insolvent debtor will often end up paying whatever sums are left over to
the government.
Further, harassing
the debtor by inappropriate telephone calls, embarrassing scenes in
public etc. can result in violation of local law. Good legal advice is
required before any particular action is taken.
The most sweeping
restriction on collection can occur if the Debtor files for protection
under the Bankruptcy laws in which case the venue switches to the
Federal Bankruptcy
Court which has its own rules and regulations. It is vital to note that
is can be a crime for a creditor to ignore the stay of actions issued by
the Bankruptcy Court and severe sanctions can be imposed upon a creditor
who ignores those restrictions. If a notice of bankruptcy is received,
call your lawyer immediately.
Do not immediately
give up if a debtor files bankruptcy. Often collection is still
possible, though the efforts will be made with an eye to the Federal
bankruptcy law rather than the State enforcement of judgment laws.
CONCLUSION:
Most judgments are
collected but all judgments require skill to collect. It is often
difficult for a party who has spent months or years fighting a claim to
realize that the victory in court was not the end of the process but
merely the beginning of another process. There is at times a feeling of
frustration that the powerful enforcement tools must be applied to
finally obtain the sums awarded.
There are ways to
get security for debt even before a legal action is necessary to collect
and the reader should review our article on
Promissory Notes
for a description of the type of protection a creditor can obtain via
UCC-1s or Deeds of Trusts or personal guaranties.
But the creditor
without such weapons should not despair. Collection may take longer and
require more money and effort…but is usually possible. Keep in mind that
although you are upset and frustrated by the need to use the tools to
collect…the debtor will be far more annoyed than you in the long run.
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