Many people assume getting a court-ordered judgment against a debtor or defendant will end a nonpayment ordeal. Payment would be automatic, right?
Wrong! The court only makes a determination about whether money is owed and how much—judgment alone does not ensure payment because the debtor may not have the ability to pay or simply refuse to do so. This article looks at what happens when a judgment is granted, the various processes involved, what may be necessary to carry out an order, and how to improve your chances of receiving payment.
Response and Court Action
Once a debtor has been served with a complaint (in person or by mail, depending on the court), he or she must respond or answer in writing within a specific timeframe, usually 20 to 30 days, providing reasons for nonpayment, including any defenses it may have.
After the debtor answers the complaint, the judge will weigh the facts and enter a judgment in favor of either party. “A judgment is a judicial determination as to the rights of the parties,” explains Mark Amendola, a partner at Cleveland, OH-based Martyn & Associates. “It spells out what the defendant owes to the creditor.”
If the debtor does not meet the deadline to answer the complaint, the court enters a default judgment, which decides the case in the plaintiff’s favor and generally awards the amount requested in the petition. The amount of time judgments can be enforced varies by state. Generally, it is 10 years; but the judgment can be renewed if monies owed have not been repaid during the initial period.
All of this sounds like a definite win—but what is a judgment really worth? Some-times, not much or little more than the paper it is written on, because the plaintiff is still dependent on the defendant’s action or lack thereof. “You’re relying on the fact that the other side will obey the court,” confirms Amendola, adding, “It doesn’t always happen.” This does not mean, however, there is no recourse for the plaintiff.
After the Judgment
After a plaintiff has been awarded a judgment, it should be recorded as a public record, which provides the creditor with many more tools to collect the debt compared to someone without a court order.
Assets can include bank accounts, wages, money in a cash register, machinery or equipment of a business entity, as well as real estate, vehicles, stocks, leaseholds, land, insurance policies, jewelry, and other personal property of the debtor.
“There is no limitation to the number of locations you can record a judgment,” Amendola contends, and this includes recording the judgment “as many times and in as many places as you want”—essentially, wherever the debtor has assets. “The first place is where the debtor resides or owns property.”
Many people assume getting a court-ordered judgment against a debtor or defendant will end a nonpayment ordeal. Payment would be automatic, right?
Wrong! The court only makes a determination about whether money is owed and how much—judgment alone does not ensure payment because the debtor may not have the ability to pay or simply refuse to do so. This article looks at what happens when a judgment is granted, the various processes involved, what may be necessary to carry out an order, and how to improve your chances of receiving payment.
Response and Court Action
Once a debtor has been served with a complaint (in person or by mail, depending on the court), he or she must respond or answer in writing within a specific timeframe, usually 20 to 30 days, providing reasons for nonpayment, including any defenses it may have.
After the debtor answers the complaint, the judge will weigh the facts and enter a judgment in favor of either party. “A judgment is a judicial determination as to the rights of the parties,” explains Mark Amendola, a partner at Cleveland, OH-based Martyn & Associates. “It spells out what the defendant owes to the creditor.”
If the debtor does not meet the deadline to answer the complaint, the court enters a default judgment, which decides the case in the plaintiff’s favor and generally awards the amount requested in the petition. The amount of time judgments can be enforced varies by state. Generally, it is 10 years; but the judgment can be renewed if monies owed have not been repaid during the initial period.
All of this sounds like a definite win—but what is a judgment really worth? Some-times, not much or little more than the paper it is written on, because the plaintiff is still dependent on the defendant’s action or lack thereof. “You’re relying on the fact that the other side will obey the court,” confirms Amendola, adding, “It doesn’t always happen.” This does not mean, however, there is no recourse for the plaintiff.
After the Judgment
After a plaintiff has been awarded a judgment, it should be recorded as a public record, which provides the creditor with many more tools to collect the debt compared to someone without a court order.
Assets can include bank accounts, wages, money in a cash register, machinery or equipment of a business entity, as well as real estate, vehicles, stocks, leaseholds, land, insurance policies, jewelry, and other personal property of the debtor.
“There is no limitation to the number of locations you can record a judgment,” Amendola contends, and this includes recording the judgment “as many times and in as many places as you want”—essentially, wherever the debtor has assets. “The first place is where the debtor resides or owns property.”
Jurisdiction
Amendola notes that in Florida, for example, when a judgment is recorded with the Secretary of State’s office, the debtor can be prevented from starting another company in the state until the judgment is paid. If the debtor resides or has a business in a state other than where the judgment has been granted, the creditor must ‘domesticate’ the judgment—that is, obtain a judgment in the debtor’s state.
Most states, the District of Columbia, and the territory of the U.S. Virgin Islands have enacted the Uniform Enforcement of Foreign Judgments Act (UEFJA). This legislation enables a judgment entered in one state to be enforced in another. Essentially, UEFJA eliminates the need for a plaintiff to start all over with a new lawsuit in another jurisdiction.
Instead, the creditor files the judgment in the county where the debtor resides or has assets, and he or she then has an opportunity to challenge the judgment on procedural grounds within a specified time period (set by the state), during which time the creditor cannot enforce the judgment.
Determining Assets
Having adequate information on the debtor’s finances and assets is an important step in collecting debt. If the creditor cannot locate financial information, believes assets are hidden, or funds are being diverted, an in-depth search may be necessary. Information can be obtained through both informal or formal channels: creditors can conduct a search themselves, hire an investigator or an asset search firm, or more formally, go through the court system for ‘post-judgment discovery’ to locate assets and sources of income.
Post-judgment discovery enables a creditor to make a court-enforceable request for relevant information and documents from the debtor and third parties, such as an employer or financial institution. A creditor can request the debtor be deposed (formally questioned) in person to answer questions about his/her assets. Or the creditor can send a list of questions to the debtor, who must respond within a particular timeframe. A noncompliant debtor can be determined to be in contempt of court and face penalties, including jail time.
Collection Options
With a judgment, the judgment creditor can seek repayment by petitioning the court for various writs and orders that include garnishing bank accounts and wages, placing a lien against owned real estate, and seizing personal property. However, state laws covering enforcement procedures vary.
Bank accounts
Amendola and Stephen DeFalco of Meuers Law Firm in Naples, FL suggest garnishing bank accounts as the best way for creditors to seek repayment. The creditor petitions the court for a writ of garnishment.
The writ requires a bank to put a hold on the debtor’s account so the creditor can be paid. The amount that can be taken from the account is determined by the judge who issues the writ. There are, however, restrictions. “The debtor can challenge the garnishment if, for example, some bank funds are exempt [e.g., Social Security payments or individual retirement accounts] under federal or state law,” explains Amendola.
Wages
A creditor also can seek a writ of garnishment for wages if the debtor is employed. This compels the debtor’s employer to deduct a certain amount from his or her paycheck every pay period and send the money to the creditor. Amendola explains that this type of writ covers not only wages or salary, but commissions, bonuses, and other compensation.
Federal law limits the amount that can be garnished from net wages—the amount left after deductions for taxes, Social Security, Medicare, and unemployment insurance—generally to 25 percent. Some states also have debtor protections in place, limiting garnishment amounts. North Carolina, Pennsylvania, South Carolina, and Texas don’t allow wage garnishment for commercial creditor debts at all.
In addition, “many states provide a head of household exemption,” DeFalco explains, which protects those who are the primary or sole source of support for a dependent. In Florida, for example, earnings garnishment is highly restricted and often denied for head of household debtors.
Due to the many variations from state to state, the Uniform Law Commission proposed a “Uniform Wage Garnishment Act” last year to streamline the garnishment process and limit the involvement of the courts. At this time, though, it is still up to each state legislature to enact the proposal.
Liens
Filing a judgment in a county where a debtor owns property automatically places a lien on the property. Once again, there are exceptions as all states exempt certain types of assets from judgment liens. For example, some states, like Florida and Texas, enacted homestead exemptions, which makes it impossible for a debtor’s primary residence to be seized. In other states, only ‘real’—that is, not personal—property can be seized.
Having a lien on real property means the judgment creditor will be paid when the property is sold. It could still take months or years for the creditor to be paid; banks or other financial institutions may hold a mortgage on the property, and there could be other creditors that have previously placed a lien on the property as well. In this scenario, Amendola says creditors will be paid on a “first in time, first in right” basis.
Depending on how many other creditors are owed, there may not be enough equity in the property for a judgment creditor to be paid in full. There is also the possibility the debtor will file for bankruptcy protection. A lien against real property is dischargeable in a bankruptcy, so the creditor may be out of luck altogether.
PACA trust protection
Creditors who have preserved their rights under the Perishable Agricultural Commodities Act (PACA), however, have a far better chance of collecting. “One of the benefits to produce sellers preserving their rights under PACA is that debts under the PACA trust cannot be discharged if the debtor declares bankruptcy,” remarks Amendola. Trust protection also enables a creditor to get a temporary restraining order freezing all assets if they are being liquidated.
“With respect to a foreclosure,” notes DeFalco, “we make the argument that the lien property is subject to the PACA trust.” This issue comes up if the debtor used any PACA-protected proceeds for a down payment or mortgage payments.
Other options
Two other collection options involve seizure of property and going after monies owed to the debtor. Each can be complicated and may not be worth the time and effort required.
To seize and sell a debtor’s property, the creditor must obtain a writ of execution issued by the court and wait for the sei-zure to be handled by a sheriff or U.S. Marshal, who will take possession of the property, sell it, and pay the proceeds to the creditor. In some cases, this may not be worth the trouble, as the “cost for a writ of execution can be excessive,” notes DeFalco.
Another option is to go after those who owe money to the debtor. “If the debt owed to the debtor is paid to [the judgment creditor], it’s akin to a writ of garnishment,” explains DeFalco. This may be difficult to accomplish, as those who owe the debtor money must be identified, located, and persuaded to pay the creditor instead of the debtor.
Final Thoughts
When filing a lawsuit to recover money owed, creditors need to understand that a judgment does not guarantee payment. It may be only the first step—one of many—needed to recover payment.
A judgment merely provides the foundation to pursue supplemental legal actions to improve a creditor’s chances of recovering money through various collection methods including wage garnishment, liens, or seizure of property. What’s more, creditors should remember that enforcement procedures can vary by state, so seeking legal counsel can help determine the best course of action and ensure every avenue is pursued.