COLLECTING DEBTS: A SIGN OF THE TIMES

July 25, 2008

By: Stephen J. Nash, Esq.
Nash & Lodge, PLLP
nash@nashandlodge.com

In a sign of the times, I have been receiving an increasing number of questions relating to judgments and collection issues from both creditors and debtors. As a practical matter many business people in real estate related businesses are both creditors and debtors – they owe money and are having trouble paying because they are owed money and are not being paid. So on one hand they want to know how to collect what they are owed and on the other hand they want to know how they can protect their assets from their creditors. The following is a summary of what creditors can do to try to collect on delinquent debts.

A creditor will first look to see if the debt was secured by collateral. The collateral could be real property (secured by a mortgage) or personal property (secured by a security agreement and/or UCC filing). If the collateral has equity the creditor will probably chose to foreclose on that collateral. If there is no secured collateral or if the collateral has no equity, the creditor will most likely chose to sue the debtor based on the contract or the promissory note that credited the debt. The one contract that debtors sometimes forget about is the personal guarantee. In the personal guarantee the debtor guaranteed the payment of a certain debt. Even though others may also be liable for the debt, even though the debtor may no longer be associated with the company or partnership that is primarily responsible for the debt, unless the debtor has been released from the personal guarantee the creditor can look directly to the debtor for the entire debt. It is then up to the debtor to try to collect from the others who may be liable for the debt.

For the creditor to go after the collateral, they generally have to foreclose. The rules of the foreclosure will come from the security agreement and/or the law. If there is more than one creditor who has a security interest in the collateral, it is important to determine the priority of the creditors. A foreclosure affects any subsequent security interest but will not affect security interests that have priority over the interest being foreclosed. So if the creditor forecloses and there is an interest that has priority over the foreclosed interest, that creditor will take the property subject to the prior interest.

If the creditor decides not to go after the collateral (or can't), the creditor can sue the debtor. What the creditor can sue for will first come from the written contract that created the debt between the creditor and debtor and then the laws that apply to the specific situation. A default may accelerate the debt so that the entire amount is now due, there may be late fees, the creditor may be able to seek recovery of all costs, including attorney fees, expended obtaining the judgment but none of these are allowed in every situation. The written contract may have to allow for it or a law may allow for it.

A creditor can bring their claim in conciliation court if they are seeking $7,500.00 or less. At times the creditor will lower that claim to that amount so that they can proceed in conciliation court instead of district court. If either party is not an individual but instead is a corporation or LLC, they must be represented by an attorney otherwise an individual can represent themselves in conciliation court. If the creditor proceeds in district court the case is started by serving a Summons and Complaint on the defendant. The defendant then has 20 days in which to serve a legal answer. This is a formal legal document. If the answer does not meet the technical requirements of an answer it can be ignored. If the defendant fails to answer or does not properly answer, the matter will be treated as a default and the court will issue a judgment granting what the creditor asked for in the complaint. Depending on the specific court, their policies and backlogs a default judgment can be obtained within 60 to 90 days, sometimes without having to attend a hearing. If the lawsuit is contested, it can be over a year before a judgment is awarded.

Once a creditor obtains a judgment and the time for appeal has passed, the judgment can be docketed in any county in the state that the creditor choses. Of course, there is a cost associated so the creditor generally will docket the judgment in the counties that the debtor owns or may own real property today or in the future. A judgment lasts for 10 years and can be extended for another 10.

A judgment allows the creditor to foreclose on non-homestead real property, garnish wages and other income and seize other personal property such as bank accounts. The creditor can send documents to the debtor demanding under oath a disclosure of the debtors assets and income. The creditor can send notices to third parties where they have to disclose whether they owe money to the debtor or are holding assets of the debtor. The creditor can depose the debtor under oath asking questions relating to the assets and income of the debtor. The information obtained can then be used by the creditor to go after the assets of the debtor.

While everyone has heard of someone who got a judgment and never could collect, the reality is that while it is worthless against a deadbeat it can cause great problems for a normal person. Who wants their employer to receive a garnishment notice? Who wants to keep closing and opening new bank accounts hoping that the creditor will not find an account with money in it? Who wants to have a judgment show up any time they have real property in their name? Who wants to deal with this for up to 20 years?

Unfortunately, due to our current economic woe's both creditors and debtors are getting an education of collections that they never wanted. Both have rights that they can exercise, problems that they need to avoid and decisions that need to be made that can help or hurt themselves down the road. Getting legal advice in the beginning stages can help you better navigate these treacherous waters.