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Getting Blood from Turnips

Timothy R. Hughes, Esq.
Hughes & Associates, P.L.L.C.

When going after delinquent accounts, obtaining a judgment is only the first step.  In the first of a series of columns on collections, we discuss the basics of handling a delinquent debtor.

Getting paid is critical for business success and at some point, you will have delinquent accounts.  You will need to make a judgment call about when to pursue your legal remedies and when to simply let it go.  Making intelligent decisions requires an understanding of the mechanics of collections.

Winning the Case:  Only the First Stage

Many clients come through the door with excellent facts and good damages.  They assume this means there is a payday coming.  The reality is that a judgment is only as good as the defendant’s ability to pay that judgment.

For example, you may have a personal injury case where the plaintiff has suffered life changing injuries.  The negligence of the defendant may be very clear and relatively easy to prove.  Unless that defendant has money or substantial insurance, the case may ultimately prove unattractive.

The same applies to collections cases involving business disputes.  Your lawyer may be particularly skilled at locating and attaching your opponent’s assets, but  there have to be assets for you to get paid.  While it is crucial to win the underlying case, you need to understand that this is only the first stage of the process.

Locating the Assets

State laws provide for various methods of locating and evaluating a judgment debtor’s assets.  The general method is through some type of testimony under oath from the debtor, coupled with production of detailed financial and accounting records.  In addition, hiring a “skip tracer” or other investigator may be fruitful to tracing down assets that the debtor may be trying to hide.

Garnishments:  My Favorite Collection Method

Once you have obtained your judgment, you can now pursue available collections remedies.  State law governs here, so the specifics of collections methods depend on your jurisdiction.  One method is garnishment.

A garnishment is a method for attaching a debtor’s assets held by a third party.  For example, you know from receiving the first two payments on a contract that the debtor has a bank account.  You can serve a garnishment summons on that bank and try to force the bank to tender any of the debtor’s funds over to you to satisfy the judgment.  Garnishments are the easiest and quickest way to obtain payment on a judgment.  Not surprisingly, they are a personal favorite.  I recommend that all my clients obtain copies of any checks they received from the debtor so that we can quickly garnish any of the debtor’s bank accounts after a judgment.

Judgment Liens on Real Property

Depending on your jurisdiction, a judgment may automatically create a judgment lien on certain real property.  You may also be able to transport your judgment to other localities to create judgment liens on addition real property.

Judgment liens can be an excellent mechanism of enforcement; but they do have limitations.  First, the debtor must actually own real property.  Second, the judgment lien comes behind any superior liens in priority.  Thus, if the debtor has no equity in the property and a significant mortgage ahead of your judgment, there is nothing left to collect on.  In addition, enforcing a judgment through a judicially ordered sale of real property is a very cumbersome process.

Judicial Sales of Additional Property 

You may be able to attach and sell other assets through a judicially ordered sale.  Like the real property sales, such procedures are highly technical and cumbersome.  Judicial sales tend to net little money on average due to high bonding requirements as well as underbidding on the value of such property.  They may, however, work under certain circumstances.  For example, if the debtor is sitting on significant valuable inventory but has closed due to cash flow problems, a judicial sale may actually be quite lucrative.