Thursday, January 13, 2011

Introduction to Judgment Collection Methods

You won your court case and the judge signed an Order stating that the defendant owes you quite a bit of money. The appeals court has dismissed the defendant’s appeal and the whole ordeal with the defendant should be shrinking into little more than a bad memory. Break out that expensive champagne and celebrate victory, because the defendant, now known as the “judgment debtor”, is picking up the tab for the festivities. NOT SO FAST!!!

Since the abolition of debtor’s prison in 1833, most court orders commanding the payment of money, also known as “money judgments”, are not enforced through the coercive power of the court’s contempt authority. Rather, money judgments are enforced by the plaintiff, now called the “judgment creditor”. The judgment creditor may utilize court processes to collect the judgment, but the court will not on its own initiative collect a judgment for the judgment creditor.

Complicating the situation is that there is no federal law governing the collection of judgments, nor is there a unified database of judgments and collection information. It is therefore no surprise that a May, 2001 article by Arlene Hirsch of the Wall Street Journal’s Startup Journal reported that approximately 80% of money judgments in the United States go uncollected. Collection law constitutes a vast field of legal doctrines arranged in an amalgamation of (sometimes conflicting) state law about which most lawyers know very little. Making matters worse is that most collection proceedings are considered to be in “derogation of the common law”, meaning that the procedural requirements must be strictly adhered to or the proceeding is deemed to be a legal nullity. This concept, in and of itself, is an interesting proposition as the common law method of collecting a debt was to have the judgment debtor sent off to debtor’s prison.

By way of introduction to the topic of legal collections, there are typically four (4) major categories of collection procedures to obtain satisfaction of a judgment: garnishment, debtor interrogatories, actual levy and liens. The purpose of this post is to provide a very general overview of each method. Of course, each method has its own unique benefits and risks, so this post is not meant to constitute legal advice. If you have questions regarding your rights, you should contact an experienced collection attorney.

The lien is probably the easiest collection method to understand, but it is often the least effective and slowest to recover money. Nearly every jurisdiction in the United States has a statute that either by operation of law or through some relatively simple procedures transforms a money judgment into a lien against the real or personal property of the judgment debtor. A creditor can utilize these statutes to collect a judgment from real estate by the following: find real property of the judgment debtor, docket the judgment in the jurisdiction where the property is located and wait until the debtor attempts to sell or refinance the property. Most states require judgment liens to be satisfied out of the proceeds of a sale of real property and the judgment debtor is generally not able to refinance without paying off judgment liens. On the other hand the judgment creditor can be more aggressive and execute on the judgment by selling the real property, but each jurisdiction has procedures that govern how to execute on the judgment against real estate. Liens on personal property work in much the same way, but are not usually as effective as liens on real estate because of the easy transferability of personal property.

The actual levy, in contrast to the lien, is probably the most difficult collection method to successfully pursue. That said, it is sometimes the best (and only) way to recover money. The actual levy is the means used by a judgment creditor to seize the tangible assets of the judgment debtor, including cash. In most states the actual levy is performed by the sheriff, marshal or court security officer at the request of the judgment creditor; the seizure involves the sheriff taking items of personal property belonging to the judgment debtor and selling them in a commercially reasonable manner. Many judgment creditors, after years of squabbling and litigating against a judgment debtor take particular satisfaction in having the sheriff take the judgment debtor’s car, farm equipment or jewelry. In some circumstances, this is a very effective method of satisfying a judgment, particularly if the judgment debtor owns valuable jewelry orshares of stock. Many states, however, require the judgment creditor to post a bond with the sheriff before the sheriff will engage in a levy. The items seized at levy may also be insufficient to satisfy the judgment after sale. Moreover, the procedural requirements for a seizure can be considerable. In many cases, the judgment debtor retains a bit of a trump card over the actual levy through the use of statutory exemptions or bankruptcy. However, if the judgment debtor’s only assets are stock or other tangible personal property or if the judgment debtor maintains a considerable inventory, the actual levy may be the best way to go. Seizure of the cash from a retail establishment, known as a “till tap”, can realize results, and make a statement to the judgment debtor.

Similar to the actual levy, but designed to reach intangible personal property is the garnishment action. Different states have different names for this procedure, but every state has a similar procedure that allows the judgment creditor to intercept assets payable to the judgment debtor by third parties. Customarily this is utilized to seize bank accounts or to intercept wages, but can also be used to intercept rental receipts, contract payments, proceeds from the sale of a business and any other item of intangible personal property. This collection method, like the actual levy, is subject to various statutory exemptions. However, in most states, the garnishment procedure is far more straightforward than the procedure for an actual levy. Moreover, a bond is usually unnecessary.

Debtor Interrogatories are used to determine the location of the assets of the judgment debtor. Some states have statutes authorizing the use of independent debtor interrogatory proceedings where the judgment debtor is put under oath by a judge and required to answer questions about the debtor’s assets, income, expenses and financial situation. If those questions reveal assets, then, in some circumstances, the judge is empowered to order turnover of those assets to the judgment creditor under the pains and penalties of contempt. Other states simply allow the judgment creditor to conduct a deposition of the judgment debtor, but the judgment debtor must determine how to seize such assets. The power of the debtor interrogatories depends in large part upon what is authorized by state statute. In addition to questioning the judgment debtor, the judgment creditor can require the judgment debtor provide financial records, such as bank account and brokerage statements.

Monday, January 10, 2011

Pre-Judgment Attachment: Get It Before It Vanishes

Publications & Seminars

Related Articles: Business Law/Commercial Landlord/Litigation

Pre-Judgment Attachment: Get It Before It Vanishes

Unfortunately, filing a lawsuit to collect a debt is often an encouragement to the debtor to move and conceal assets. This sometimes makes creditors hesitant to take early legal action. But, Virginia law has a solution: the pre-judgment attachment. Virginia law allows a creditor to bring the debtor's property into court custody at the outset of a lawsuit, thereby assuring that the property will be available to satisfy any judgment the court eventually grants.

Virtually any significant asset of a debtor can be subjected to attachment. Although real estate and business equipment are the most popular targets, a creditor can also attach bank accounts or even other monies owed to the debtor by a third party. One useful application of pre-judgment attachment occurs in construction cases, when a sub-contractor attaches payments to an out-of-state general contractor. An interesting case is the attachment of an elephant from a traveling circus; unfortunately, the creditor neglected to compute the cost of feeding the animal before taking this ill-advised action.

To secure a pre-judgment attachment the plaintiff files a sworn petition setting forth the cause of action and the grounds for the attachment. The justifications for attachment must fall within one or more of the categories allowed by Virginia Code Section 8.01-534. If the petition is approved by a judge, the creditor must post a bond of twice the amount of the claim. Upon posting of the bond a warrant will be issued ordering the sheriff to seize the property and bring it into the custody of the court. Generally, the debtor will request a hearing within twenty-one (21) days of the seizure at which time the court will determine whether the property will be released or remain in custody until the lawsuit is completed. Many attachments are dismissed at that hearing because of failure to comply with the technical requirements of Virginia attachment procedure.

Pre-judgment attachments do involve certain risks to the creditor. The bond is posted in order to compensate debtors for the improper seizure of their assets. Therefore, creditors should not use attachments for questionable claims. Nevertheless, the judicious utilization of this legal tool can be the difference between an empty judgment and a collected judgment.

Grounds for Attachment:
In summary form, it is sufficient grounds for attachment that the defendant:

  1. Is a nonresident corporation or individual, which has assets or debts owed to it in Virginia

  2. Is removing or about to remove out of the Commonwealth with intent to change domicile

  3. Intends to remove, or is removing, or has removed the specific property sued for or his assets or the proceeds of the sale of his property out of the Commonwealth so that the debtor will not have therein assets sufficient to satisfy the judgment

  4. Is converting, is about to convert or has converted his property into money, securities or debt with the intent to hinder, delay or defraud creditors

  5. Has assigned or disposed of or is about to assign or dispose of his assets with intent to hinder, delay or defraud creditors

  6. Has absconded or is about to abscond from the Commonwealth or has concealed himself to the injury of his creditors, or is a fugitive from justice.

The Collection Plan: Taking Control of Your Accounts Receivable

Publications & Seminars

Related Articles: Business Law/Commercial Landlord

The Collection Plan: Taking Control of Your Accounts Receivable

You've completed your service for the client and sent out the bill. But the money is not yet in your hands. You could just sit and wait (and hope), but we suggest a better alternative: a collection plan. A comprehensive plan will make collections more successful by informing clients of their obligations and identifying bad debts early enough to take appropriate action.

Formulating an effective collection plan is the first and most important step in getting control of your accounts. By setting up a comprehensive scheme for dealing with accounts receivable collections, you can obtain your money faster and avoid the necessity of going to an outside collection agency or attorney.

In constructing a collection plan it is important to strike a balance between effective collections and not angering (and losing) clients. At the same time it is necessary to quickly identify those clients who will not pay, so that more drastic actions are initiated.

In order for a collection plan to be effective it must treat all accounts according to the same policy so that your staff and clients know their obligations. This consistency will can be best achieved through the creation of a "schedule", similar to the one show below, which sets out the various contacts that should be made with the debtor at appropriate intervals. When designing a schedule you need to keep diplomacy in mind as well as your financial needs. A bookkeeper can call a client to check on an account a certain amount of time after a bill has been sent. If this is done incorrectly it can be very rude and will be likely to antagonize your clients, but if it is done properly it can be both polite and effective.

The schedule show below is only an example; you will have to design your own plan to suit your particular business needs.

At some point it will become apparent that any further efforts to convince a client to disgorge the unpaid funds would be futile. The whole point of a collection plan is to determine who is not going to pay, and to determine it as quickly as possible. Our own feeling is that any account which is over 90 days past due should be considered a bad debt and sent to an attorney for collection.

Accounts Receivable: A Plan to Improve Your Collections

Effective management of accounts receivable requires a written procedures manual, so that the patients, the office staff and the doctors understand everyone's duties and responsibilities. This plan will increase in-house collections.

A comprehensive collection plan that informs your patients of their obligations and identifies bad debts early can go a long way toward putting you in control of your accounts-getting your money more quickly and minimizing the cases sent to an attorney or collection agency. Any such plan that you devise must strike a balance between a policy that is too harsh at the cost of strained relations, or a lost patient, and one that is too permissive at the cost of profitability. Even the best plan will prove futile in some cases, when it becomes apparent that any further effort to convince a patient to pay will fall on deaf ears. Identifying bad debts and quickly sending them out for collection will improve your success rate.

This sample outlines a mix of written and oral reminders. Perhaps one like it will work for you.

Past Due Contact Type
15 days Pleasant memo: "Do you need more information?" -- written
30 days Polite inquiry: "Just a reminder." -- oral
45 days Strong reminder: "Is there a problem?" -- written/oral
60 days Strong demand: "Please pay now!" -- written/oral
75 days Final demand: "Pay now or face legal action." -- written/oral/personal visit
90 days Place debt with collection agency or attorney