Thought Leadership on Banking and Commercial Transactions presented by Weinstock, Friedman & Friedman P.A.
In our previous two articles, we discussed how to keep from accumulating bad debt and how to handle it if you end up with bad debt anyway. For this third installment in the three-part series, we will discuss how to turn that bad debt into money for your business.
Let’s imagine you have a delinquent account receivable. Despite your best efforts to avoid having to resort to the court system, the account still resulted in a lawsuit. The good news is, you won the case and have a money judgment. But how do you turn that judgment into cash for your business? Fortunately, the law provides you with several tools to do that.
- Wage garnishment
This is a simple proceeding whereby you request that the court allow you to take a portion of your debtor’s paycheck in payment of your debt. Many debtors have jobs, so this is low-hanging fruit in terms of collection on your judgment. However, the law in most jurisdictions only allows for 25 percent of the debtor’s net pay to be withheld from the paycheck. This could result in a very slow repayment process, but the good news is that the writ of attachment on wages is ongoing until the account is satisfied. This means that while repayment may be slow, the creditor does not need to continuously refile the writ to keep the garnishment going. While a wage garnishment can be the most effective form of post-judgment execution, it should not be the only arrow in your quiver.
- Garnishment other than wages
Another collection option is to garnish assets other than wages. This collection tool works similarly to the wage garnishment, but it allows you to attach other, non-wage assets. The most common such asset is a bank account. If the debtor paid you via check, you can determine from those cancelled checks where the debtor banks. The information may also be included in the application or contract that supports the debt. You can then file a writ of garnishment other than wages upon the bank where your debtor holds its money, and take that money to pay your debt.
This form of post-judgment execution is more cumbersome and, just like in the writ of attachment of wages, there are laws that exist that protect the debtor’s bank account if it’s a consumer account. For instance, if you hold a consumer debt that has been reduced to judgment, the debtor can elect to protect or exempt $6,000 (if married, the protectable amount increases to $12,000) of any money in the account. Please note that this election is not automatic and needs to be specifically requested by the debtor. The creditor is under no obligation to place the debtor on notice of the ability to claim the exemption. If the exemption is requested, the creditor should release the account once the account balance is confirmed to be less than $6,000 (or $12,000 in the case of a married couple). Finally, be mindful of the fact that the writ of attachment other than wages is not continuous in nature and does need to be refiled once the previous writ is completed.
- Lien and attachment
When you have a money judgment, the judgment acts as a lien against all real estate held by the judgment debtor in the jurisdiction where the judgment was entered. You can also have the judgment enrolled as a lien in other jurisdictions, which is an effective strategy if you believe the debtor may hold real estate in other jurisdictions.
Once the lien attaches to the property, when your debtor goes to sell their real estate, your debt may get paid from the proceeds of the sale. The liens and the judgment last for 12 years in Maryland and Washington, D.C. and are generally renewable so long as the request to renew is done before the judgment expires. The lien will also appear on any credit inquiry completed on the debtor. So even if the property in which the lien attaches is not sold, the debt may be satisfied as part of another financial transaction. So while you may need to be patient, the law provides you the ability to keep your lien in place for considerable amounts of time while you wait.
If you don’t want to wait for the property to be sold, the law provides processes whereby you can force the real estate to be sold specifically to pay off your debt. There are going to be cost-effectiveness decisions you must weigh before deciding to do this, however. For example, you will want to know how much equity there is in the property. How much debt is already placed on the property, and what kind of debt is it? What is the legal priority of each lien amount? (Different kinds of debt carry different legal priority in terms of the order in which debts get paid from the proceeds.) How much will it cost in legal fees to force the sale? Ultimately, you want to determine whether there will be funds left over from the sale proceeds to pay your debt once everyone with a higher legal priority gets paid before you. All of the financial ramifications should be weighed before embarking on this course of action.
In addition to the judgment being a lien on real estate, you can also have the judgment attach to non-real estate property (also called personal property). Particularly in the commercial debt arena, the law provides you the ability to request that the court issue a sheriff’s writ, which allows you to have a sheriff enter the business of the debtor for the purpose of identifying and confiscating assets of value. Those assets are then subsequently sold via auction by the sheriff, and the proceeds of the sale are given to you to satisfy the debt. The cost of this sale can be excessive, so often the tactic can be used to convince the commercial business to remit payments or satisfy the debt and keep the sheriff out of their affairs.
- Oral examination
Finally, if you do not have any knowledge of your judgment debtor’s assets, or even if you want to verify, you can ask the court to compel them to come to court for an oral examination. During this oral examination, you are permitted to ask questions of your judgment debtor to attempt to determine whether they have any assets of value, and where those assets may be held. The debtors are required to answer the questions under oath. Once you find out the location of their assets, you can use the tools mentioned above, and attempt to secure valuable assets to pay down the debt.