Legal Ways to Collect Debt – Garnishment, Judgments, More
Some of the more advanced aspects of debt collections are in legal strategies used to collect debt. Unfortunately, there are times when the borrower is unwilling to resolve a delinquent account, even though they have the means to do so. In these instances, it is necessary to use legal measures in order to resolve the delinquency. A successful collector will know what these measures are, what they mean, how they are used, and when they are used.
Foreclosure deals primarily with mortgages and home equity credit lines. Repossession commonly occurs with auto loans. Offset occurs when the loans collateral is a financial asset, such as a deposit account at a bank. In house, first party collections, such as a bank, will use these to assist in resolving a delinquency as a last resort. In the cases of foreclosure and repossession, when the collateral is seized it is then sold at auction and the proceeds from the sale are applied towards the balance of the loan. Often, there is a remaining, unresolved balance, called a deficiency balance, which is now unsecured debt.
There are legal measures that exist to collect on unsecured debt and deficiency balances. Once a judgment exists in a court of law, a creditor may obtain a court order enabling them to execute on the judgment, thereby receiving funds from a borrower’s assets involuntarily. Execution on the judgment may include methods such as wage garnishments, bank account levies, placing liens on real property and till-taps.
While some collection agencies have a legal department, many creditors and collection agencies hire law firms specializing in creditors’ rights to initiate a lawsuit, obtain judgment, and then collect on the judgment. While creditors’ rights attorneys are, of course, familiar with collection laws, paralegals and legal assistants must also be very knowledgeable of such laws and their practical applications. Many paralegals and legal assistants who work at a collections law firm will at some point in their career need to handle a collections call, and some were even collectors themselves before moving into the legal field.
Civil litigation laws vary from state to state but the general process will be similar. Once initiation of a lawsuit occurs, service of a summons and complaint is required. There is a certain amount of time to respond to, or answer, the lawsuit. If the creditor or agency does not receive an answer, they may be entitled to receive a default judgment in the case. If the creditor or agency does receive an answer to the lawsuit, the court may require arbitration, a trial, or other hearings in order to decide the outcome of the case. Often, the creditor or agency and the borrower will agree to a payment arrangement through a stipulated judgment.
Although the terms of a stipulated judgment will vary from firm to firm, it will commonly include the stipulation that as long as the borrower makes agreed upon payments, no further action is necessary to enforce the judgment. Should the borrower fail to make any payments, the creditor then reserves the right to execute on the judgment. Judgments, whether they be default judgments, stipulated judgments, or general judgments, often award the creditor not only what the borrower originally owed, but also court costs, reasonable attorneys’ fees and post-judgment interest.
Two basic categories of law that vary from state to state and which a collector should keep an on-hand reference of are the laws governing statute of limitations and community property laws. The statute of limitations determines how long a creditor has to file a lawsuit against a borrower, based upon the date
of last payment. Community property laws, in short, give the creditor the right not only to speak with a borrower’s spouse, but also to pursue judgment against the borrower’s spouse and their marital property in addition to the borrower. The nine community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In addition, a state may enact laws intended to supplement and may be stricter on collectors than the FDCPA.
Once a creditor obtains a judgment, they have the option to record the judgment with the county, thereby placing a lien on the borrower’s real property. Should the borrower attempt to sell this property, the judgment must be satisfied, or paid, before the title company will release the title. Assuming there is equity in the property, this method is an almost sure way to collect on a debt even though it is possible there will not be a sale of property for several years after the judgment, or not sold at all.
Two methods that can potentially yield a quicker result include a wage garnishment and bank levy. In the case of a wage garnishment, the judgment creditor may request a court order instructing an employer to withhold a certain percentage of the borrower’s income and pay it instead to the creditor. Government agencies such as the Internal Revenue Service and Department of Education have the ability to issue an Administrative Wage Garnishment without the issuance of a court order. A bank levy is similar except that in this case, the court orders the bank to turn over funds held in a bank account or even safe deposit boxes held for the borrower. Certain funds, such as social security income, social security disability, and pensions are exempt from garnishment.
One method not used as frequently as it was in past years is a till-tap. A till-tap requests that the sheriff go into a business and physically remove cash that is in the register to turn over to the judgment creditor. This is not only expensive, but has also become outdated as credit and debit cards are used more often by consumers, resulting in less cash being in the register to be seized at the time of a till-tap. Some state may have remedies available that others do not, or vice versa. For example, South Carolina prohibits wage garnishment. Alaska allows a creditor to levy on the Permanent Fund Dividend.