Turning Your Judgment Into Cash
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In cases ranging from simple small-claims matters to large, complex commercial disputes, winning your case – that is, obtaining a judgment against your opponent – may prove to be just the first step in recovering your loss. You are now a judgment creditor: you have a piece of paper ordering the defendant (now a judgment debtor) to pay you a sum of money, but you can’t use that piece of paper to buy gasoline, or pay the note on your rental property, or reward your employees. This article will share some basic strategies for collecting on a judgment. Each case is different, and there can be serious consequences for violating bankruptcy and debtor-protection laws, so it’s always a good idea to work with an experienced creditor’s attorney.
1. Negotiate with the judgment debtor.
Although creditors often find this hard to believe, many judgment debtors agree that they owe the money and would pay it if they had the means to do so. The first and most important step in collecting a judgment, therefore, is to talk to the debtor, find out what he or she can pay, and try to work out a suitable payment arrangement.
Why should you play nice with someone who has already failed to pay what they owe you? There are several reasons. First, if the debtor makes payments voluntarily, you can save yourself considerable time and effort filing court pleadings, attending hearings, and waiting for orders. Second, the debtor may have access to funds that you could not reach otherwise, because they are exempt from garnishment or come from someone else. For example, a debtor may be able to borrow money from friends or family to make a lump-sum payment (many creditors will accept a substantial discount if paid as a lump sum). Similarly, a debtor who is unemployed, and whose unemployment insurance cannot be garnished, may agree to make small payments while seeking work.
Finally, negotiating payments that the judgment debtor can afford makes it less likely that the debtor will file bankruptcy (more on this below). If the debtor does file bankruptcy, you must stop your collection activities immediately, and there is a very good chance that you will not receive any payment at all in the bankruptcy proceeding. Being too aggressive in garnishing the debtor’s wages and bank accounts can be counterproductive if it leads to bankruptcy.
2. Proceedings supplemental and garnishment.
If a judgment debtor does not pay a judgment, the next step in the legal process is called a “proceeding supplemental.” The judgment creditor files a motion with the court, and the court issues an order for the judgment debtor to appear. At this stage, it’s essential that you know where to find the judgment debtor, because the order to appear is not effective if not properly served. When the debtor appears, the judgment creditor has the opportunity to ask questions, under oath and in front of a judge, about the debtor’s assets and income. Two pieces of information are especially important: where the debtor works, and where he or she has bank accounts.
Identifying the judgment debtor’s employer is the first step toward obtaining a wage garnishment, which is the most common legal device for collecting a judgment against an individual. A judgment creditor can learn this by asking the judgment debtor. In Indiana, a judgment creditor can also obtain this information from the Department of Workforce Development. The creditor then asks the court to issue an “Order to Answer Interrogatories,” which requires the debtor’s employer to answer written questions, under oath, confirming information such as the debtor’s employment, earnings, and whether there are already garnishments in place. Once the employer returns the interrogatories, the judgment creditor can request a garnishment order. This is an order from the court to the employer to apply a portion of the judgment debtor’s wages, subject to certain exemptions, to the judgment until the judgment is paid.
A bank garnishment follows a similar procedure. The judgment creditor learns where the judgment debtor banks, and requests an Order to Answer Interrogatories. In Indiana, the court may accompany this with a restraining order that freezes any of the judgment debtor’s accounts with the bank for 90 days. Bank garnishments are most effective, therefore, if the judgment creditor can learn where the judgment creditor banks before filing beginning the proceeding supplemental, because the creditor can freeze the debtor’s bank accounts without warning, and without providing an opportunity for the debtor to remove the funds. Like a wage garnishment, once the bank returns the interrogatories, the judgment creditor then requests a garnishment order that orders the bank to apply the judgment debtor’s funds to the judgment. As with wages, bank garnishments are subject to exemptions that vary from state to state.
Wage and bank garnishments are by far the most common ways to collect from individuals. Less commonly, a judgment creditor may request documents, such as tax returns or insurance policies, directly from the judgment debtor in order to find additional assets or income sources. In rare cases, a judgment creditor will use judicial process to seize and sell the judgment debtor’s real estate or personal property. Most of the time, this is not worthwhile because most judgment debtors have too little non-exempt equity in their homes for the judgment creditor to recovery anything, and because state personal-property exemptions are typically high enough to encompass all of the debtor’s belongings. If you believe your judgment debtor has significant assets – such as substantial equity in real estate or an expensive car or boat that the debtor owns free and clear – talk to an experienced creditor’s attorney about additional collection strategies.
3. What about bankruptcy?
Many judgment debtors threaten to file bankruptcy, and some follow through. If the judgment debtor merely intends to file bankruptcy, but has not yet done so, collection activities may continue. Once the judgment debtor files bankruptcy, however, all collection activities must stop. This applies not only to the methods discussed in this article, but any other attempt to make the judgment debtor pay the debt. Additionally, all garnishment orders (such as wage garnishments) will stop.
Bankruptcy proceedings take place in the United States Bankruptcy Court, a specialized federal court. There are important deadlines that arise early in the case, so you should consult an experienced creditor’s attorney promptly if you learn that your judgment debtor has filed bankruptcy and you wish to pursue the matter.