When suing a debtor, having a judgment in your favor is only part of the battle. There are several steps you may have to take to recoup what you are owed.
- Once a judgment is issued, the debtor must either file an appeal or pay you.
- Following a court ruling, judgment debtors must file a financial disclosure report listing their assets, or a judge may order a debtor to appear in court for a debtor's examination.
- You can collect on a judgment by filing a lien, seizing the debtor's assets seizures or renewing the judgment.
- This article is for business owners looking to collect a debt following a court ruling.
When suing a client who owes your company money, the judgment that the court issues might seem final and binding. In reality, that is and isn't the case. A judgment debtor must indeed pay the debt according to the law, but the courts have little authority to compel payment. That's why it's important to know how to collect on a judgment if your debtor fails to pay you.
What happens once a judgment is made?
Once a judgment is issued, the winner of the court case becomes the judgment creditor, and the loser becomes the judgment debtor. After the court has issued its judgment, the court clerk sends a written decision to all involved parties. This decision specifies how much the judgment debtor owes the judgment creditor. If you've sued more than one individual, the court's decision will list the total amount that all parties owe you. These parties must then divide the responsibility for payment among themselves.
A judgment is not always official immediately upon being issued by a court. That's because the judgment debtor has 30 days (or less in some states or municipalities) to file an appeal. If the judgment debtor appeals, then their obligation to pay you is delayed until a new judgment is issued. [Read related article: How to Write a Debt Collection Letter]
If an appeal is not filed, then the judgment debtors are legally obligated to pay you. However, the enforcement of this obligation is another matter.
Key takeaway: After a judgment is issued, the judgment debtor must either appeal the ruling or pay you, but judgments don't include enforcement measures.
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Judgment debtors and assets
Shortly after a judgment is issued, the debtor must file a financial disclosure statement. In this statement, the debtor lists all of their assets. If they fail to complete this step, a contempt of court charge can be issued.
Alternatively, a judge can demand the debtor to appear in court for a debtor's examination. Judgment creditors should attend this examination, and the debtor should disclose all of their assets in each of the below categories:
- Checking and savings accounts
- Investment accounts
- Business ownership shares
- Trusts and inheritances
- Safes, vaults and other secure storage spaces
- Real estate
- Personal property, including homes, vehicles and jewelry
- Property transfers, as properties transferred for prices below their fair market value may indicate fraud intended to circumvent debt
If a judgment debtor doesn't appear for an ordered examination, the judge may issue an arrest warrant.
Which judgment debtor assets should you pursue?
In an ideal world, a judgment against a debtor would immediately compel them to repay their financial obligation to you in cash. However, some debtors may still resist payment. In this case, you may be able to seize certain assets. You can do so by:
- Garnishing the debtor's wages
- Taking cash or assets directly from businesses the debtor owns
- Seizing real estate or vehicles
Often, the first two approaches are easier than the third one.
Tip: Judgment debtors must disclose all of their assets in a financial disclosure form or appear in court for an examination. If they don't, they risk additional charges or arrest.
How long does it take to enforce a judgment?
Judgments are valid for varying periods of time, depending on the state in which the lawsuit was filed. Pennsylvania has the shortest enforcement period at four years, and approximately a dozen states share the longest enforcement time of 20 years. Consult the applicable state court, or speak with a lawyer to determine how long you have to enforce the judgment.
However, as mentioned earlier, a judgment isn't in and of itself enforceable. If the judgment debtor still refuses to pay, only certain authorities can move forward with enforcement.
Did you know? The time during which you can enforce a court judgment varies by state and can range from four to 20 years.
How to collect on a judgment
To collect on a judgment, take the following steps.
1. Perfect a real estate lien.
Whether or not your judgment debtor files an appeal, you should prepare for the worst – namely, your debtor attempting to hide their assets and thus making collecting your judgment more difficult. You can plan for this outcome by perfecting a real estate lien.
To perfect a real estate lien, you must record your judgment with the county recorder's office. With a lien in place, your debtor must fulfill the judgment before they can sell their building or property. Additionally, a real estate lien may remain valid if the debtor files for bankruptcy.
2. Reach out directly.
Sometimes, you won't need to seize property. You might find that reaching out to the debtor to request payment after a court judgment is enough to compel the payment you've long sought. Don't threaten the debtor or detail how you plan to collect the judgment if you don't receive it in a timely fashion, but remain firm that the debtor now legally owes you money.
3. Choose the right assets to seize.
Wage garnishment, business cash or asset seizure are all valid ways to collect the money your debtor owes you. However, consider the following as you do so:
- Wage garnishment is easy but slow. It's often straightforward to obtain a writ of garnishment requiring that part of your debtor's wages be garnished and given to you. However, garnishments are usually capped at 25% of the debtor's wages, making full repayment of your debt a slow process. Additionally, some low-income debtors may be exempt from garnishment, and government benefits payments cannot be garnished.
- Business asset seizure requires enforcement. Only law enforcement authorities can seize cash, money stored in bank accounts or other assets. Additionally, they may charge a fee for their services. However, if your debtor's assets are valuable enough to cover their debts, seizing these assets may be worthwhile.
- Personal asset seizure is even more complicated. If you're going after a debtor's personal property, they likely have equity, which is the difference between an item's current value and its loan value. Many states forbid judgment creditors from seizing a certain amount of equity from debtors. These rules mean that homes, vehicles, investment accounts, electronics and jewelry can be tough to seize.
- Occasionally, you can file judgments with licensing boards. If the judgment debtor is a remodeling or building contractor, you may be able to file your judgment with the relevant state licensing board. In doing so, your debtor could lose their license if they do not comply with the judgment. However, this route is only viable in extremely specific circumstances.
Given the above considerations, you'll need to make a determination about the ease of collection with the urgency of the debt. Should you pursue wage garnishment but wait far longer to collect your full debt? Are you willing to work with sheriffs or marshals for business asset collection? Is the potentially large value stored in your debtor's personal assets worth the work to obtain the amount that you're owed?
4. Renew your judgment.
As mentioned above, judgments aren't permanent. However, they are renewable, a feature that can help with debts that take years to collect (which, believe it or not, isn't unheard of).
A renewed judgment is often valid for as long as the original judgment was valid, starting from the date of renewal. Each state's court system handles judgment renewals differently, so speak with a debt collection lawyer about how to go about this process.
5. File a satisfaction of judgment notice
After the debts are paid, the judgment creditor submits a "satisfaction of judgment" notice to the court. This notice informs the court that it can close the case. Similarly, if you perfected a lien on the debtor, as described earlier, you would file paperwork with the aforementioned recorder's office.
6. Hire a collection agency.
Collection agencies are often viewed as a measure to be taken after standard communications with a nonpaying client have failed but before a lawsuit is filed. Some collection agencies, however, specialize in collecting debts from debtors who defy judgments.
There are freelance creditors, too. However, for small business debt collection, agencies can be too expensive to merit their work, given what they are likely to recoup. Some agencies may take up to half of the debt they collect as their payment, though others may take closer to 25%. In either case, you'll pay quite a bit.
If, though, you feel that collection agencies are your best route for collecting on a judgment, consult our recommendations for the best collection agencies to find the right partner for your needs.
Key takeaway: To collect on a judgment, you could place liens on the debtor's real estate, contact the debtor, pursue their assets, renew the judgment with the court and/or hire a collection agency.