The fact that your business has been hit with a judgment entered against you does not mean you lose money the minute the judge taps the gavel. In fact, every day many businesses and individuals do not pay what the court says they owe. It’s up to the party entitled to receive the money to take the next steps to enforce the court’s judgment. That’s what this article covers. Remember, a judgment is not the end. A judgment is merely the beginning of a new stage, and knowing how it works gives you a chance to make better decisions.
Whether the Debtor Can Pay
The tools available to a creditor vary depending on the circumstances, and some are only available against certain types of business entities. In addition, the remedies vary from jurisdiction to jurisdiction. But in many cases, the only thing that matters is whether the debtor can pay the amount owing, either immediately from cash on hand, by selling assets, or over time. Take stock of what you can realistically pay, whether it’s with cash you have in the bank, by selling off assets, or paying the debt off over time. That will help shape which collection tools will be most effective and whether it’s worthwhile to settle.
If your company has no assets, has wound down operations and has no realistic hope of future revenue, then it may not be worth it for the other party to keep chasing you. They may never be able to collect. In that situation, your company could effectively be judgment proof. Some lawyers will actually run a collectability analysis to see if any assets can be collected before even bothering to file a lawsuit. But if your company has a long history and significant assets or accounts receivable and is still in business, then there’s a chance a creditor could actually collect a debt. That’s when a creditor may pull out all the stops.
Seize Your Assets
The most familiar tool is the writ of execution. That’s a court order directing a sheriff or other law enforcement officer to seize your assets to satisfy the judgment. Those assets can include personal property, real property, or bank accounts. For real estate and bank accounts, additional steps may be required. Seizing a judgment debtor’s tangible property can require considerable investigation. So, knowing what assets a debtor owns is often a high priority. A creditor may investigate to find assets, but it may already know a lot from the lawsuit itself.
If a judgment debtor has facilities or bank accounts in different jurisdictions, then the creditor may have to get a writ of execution in each jurisdiction where the property was found. Depending on local law and the type of property involved, the property may either be sold and the proceeds remitted to the creditor, or the creditor may take the seized property itself.
Sometimes just the threat of a writ of execution is enough to get a business to cough up the money. In the case of a business owner, the threat is a signal that the creditor is for real. Of course, the debtor is free to fight a creditor’s request for a writ of execution. However, that just starts another legal process, which adds costs to the creditor. It also means that the debtor’s money continues to be drained away as the legal battle intensifies. It’s something to think about strategically.
A levy is how the creditor can obtain money from your bank account. And a levy is typically done through a writ of execution. Your creditor needs to know the name of your bank and the branch where you have the account to levy. Once the levy is issued, law enforcement sends a notice of levy to the bank and then takes control of the money in the account.
When a creditor files a lien, it doesn’t mean it is coming to take your stuff right away. A judgment lien typically attaches to the judgment debtor’s real estate, but it can also attach to equipment and other personal property. When the property is sold, the judgment lienholder (that’s the creditor) is entitled to be paid from the proceeds. If you plan to sell real estate or other equipment, then you need to take this into consideration.
If your company is an LLC or a partnership, there is one more tool to know about. A judgment creditor can obtain a charging order against a debtor partnership or LLC, and that order works like a wage garnishment, only it’s for a business instead of an individual. And only certain kinds of partnerships and LLCs are subject to the charging order. What does that mean day to day? It means that the creditor is going to get paid, out of the business’ income, over and over again until your judgment is satisfied. A charging order can exist at the same time as a levy, lien or writ, and creditors often use it in conjunction with those other tools.
A Chance to Settle
There’s a chance to settle even after you’ve lost in court. If the expected expense of enforcement exceeds what the creditor can realistically collect, the creditor may be inclined to settle for an amount you’re prepared to pay voluntarily. Even after the judge rules, there’s still something each side has to hold over the other.
A creditor might not have total leverage. For one thing, collecting a judgment can be expensive. Depending on where and how many properties the judgment debtor owns, a creditor may have to file several writs of execution or levy in different jurisdictions. A judgment debtor may fight collection with one action after another. That’s why a creditor may be more interested in a voluntary payment than in taking enforcement action.
Both sides—creditors and debtors—end up spending money and time dealing with a judgment that either can’t be or won’t be paid. It’s a waste of both. The best way to avoid it is not to get into such a predicament in the first place. But once you have a judgment on you, you have limited options. Work closely with your attorney, but you’ll need to decide whether you want to wait for a creditor to act or negotiate a settlement sooner.
