Special to the Sun
Nearly all business owners and many individuals will find themselves at one time or another in the unenviable position of being owed money. The question then arises: is the debt collectible and, if so, how does one go about collecting it? There are many factors which must be taken into consideration, and, while the space limitations here prohibit an exhaustive discussion on the topic, this article will touch on some of the more practical considerations for a creditor.
First and foremost, the financial situation of the debtor must be taken into account. As the old adage goes, “you cannot get blood from a turnip.” If the debtor is insolvent or otherwise has no assets, any judgment obtained against him may not be worth the paper on which it is written. However, most companies that are a going concern and most individuals who are employed have at least some income which may be potentially reached by a creditor. And a simple Internet search reveals any number of asset search companies that provide relatively inexpensive services which can uncover vehicles, boats and other personal property which the debtor may have at his disposal.
Once the creditor has an idea of the debtor’s financial situation, he must decide whether it is worth pursuing the debt and how. This decision is driven in large part by the size of the debt. If the amount owed is less than three thousand five hundred dollars ($3,500.00), a creditor should strongly consider handling the matter himself in justice court. In justice court, the creditor simply drafts (usually by hand) a simple complaint against the debtor setting forth the amounts owed and how the debt was incurred. The sheriff then serves the debtor with that complaint and a summons to appear in court on a certain day. A trial is held on that day before a justice court judge who hears testimony from both sides and then typically rules on the spot as to who prevails. Assuming the debtor has no valid defenses or fails to appear, a judgment is entered that day in favor of the creditor. The only expenses typically incurred by the creditor in this process are the filing/sheriff’s service fees and any court costs. But, of course, at the end of the day, the creditor has only a judgment which still must be collected unless the debtor voluntarily pays. Even with the reduced costs associated with justice court, a relatively small debt may not be worth the time, effort and cost of collecting.
If the debt is more than three thousand five hundred dollars ($3,500.00), suit must be filed in county or circuit court, and a creditor usually will want to have an attorney involved. Where the attorney charges an hourly rate, expenses can quickly mount. However, it is almost always worth, at a minimum, having an attorney write a demand letter as this will oftentimes prompt payment from a debtor who simply has been neglecting the debt for whatever reason. If the letter garners no response, the decision must be made as to whether to proceed with suit. The fees associated with suit will vary depending on jurisdiction and whether the debtor actually contests the suit. Where the amount owed is less than ten thousand dollars ($10,000), serious consideration must be given to the debtor’s financial situation and whether there is a realistic chance of collecting on any judgment before proceeding. Not only are there costs associated with obtaining the judgment (e.g., drafting pleadings, filing fees, service fees, any required court appearances), but, as discussed below, there are the costs associated with collecting any judgment obtained. These costs can quickly eat up a smaller debt. And although such costs are recoverable in certain situations, such as when the debt is incurred on an open account or the contract between the parties provides for the recovery of attorney’s fees, having them included in the judgment does not mean the creditor will ever recoup that money.
If the amount owed is more than ten thousand dollars ($10,000), it is usually worth at least obtaining a judgment against the debtor. Oftentimes the debtor will not even answer the complaint, and a default judgment can be taken with relatively little work expended by the attorney. The judgment remains valid for seven years (and can be re-enrolled after that time if necessary). Even if it may not be collectible at the present time, the debtor’s financial situation may change in the future, and the judgment will already be in place and ready to collect.
The final step in the collection process is executing on the judgment. Probably the two most effective tools for satisfying a judgment are a writ of garnishment and a writ of execution. A writ of garnishment is issued by the Court to a third party, such as a bank or the debtor’s employer, and that person/entity must file something with the Court stating whether: (1) he owes the debtor money or knows of someone who does; (2) has any property of the debtor or knows of someone who does; or (3) whether he employs the debtor and, if so, his rate and time period of payment. If the third party has any property or funds of the debtor at the time of service of the writ, they are paid to the creditor instead. And if the debtor is employed by the third party, up to 25 percent of the debtor’s salary is paid to the creditor until the judgment is paid off. There are certain exemptions which a debtor may claim, but when a bank freezes the debtor’s account or he gets notice from his employer that a portion of his paycheck will be withheld, that usually will prompt an immediate response.
Similarly, if the creditor is aware of unencumbered real or personal property owned by the debtor, he may have a writ of execution issued by the Court whereby the Sheriff is ordered to seize the property and sell such property at auction to satisfy the judgment. Again, certain exemptions may apply, but the prospect of losing a home, vehicle, etc. will usually prompt a response from the debtor.
Finally, if the creditor has no idea where the debtor is employed or has assets, he can file a motion with the Court to conduct a judgment debtor examination whereby the debtor is ordered to appear in open court and answer questions about his finances. This prospect leads to trepidation in many debtors, and they will oftentimes seek out a resolution with the creditor beforehand simply to avoid it.
As should be evident at this point, the decision on whether and how to collect a debt is one that must be made upon the unique facts of each situation. No two debtors or debts are alike. Nothing is more frustrating for a creditor than to spend more money trying to obtain money that is already rightfully owed…especially when the efforts ultimately are to no avail. As such, the individual or business must make a conscious decision based upon a number of factors, including the size of the debt and the financial situation of the debtor, as to whether and how to proceed.
C. Stephen Stack Jr. practices in the litigation section of Biggs, Ingram and Solop, PLLC, in Jackson with an emphasis on transportation law, premises liability defense and insurance coverage litigation. For a complete biography and list of areas of practice, go to www.bislawyers.com.
(photo) C. Stephen Stack Jr.
