What Tools Can Be Used To Collect Debts Prior To And After Filing A Lawsuit Against A Debtor?
To attempt to collect debts prior to filing a lawsuit against a debtor, a demand letter can be sent to the business or individual who owes money. This letter should explain why they owe the debt, and when appropriate, should threaten litigation. Ideally, the demand letter will be sufficient to compel the debtor to pay the debts. In other situations, we may be able to take a different approach by simply calling the debtor and discussing ways they could pay back the debt through a payment plan. Both of these options are preferred to having to go through the time and expense of litigation.
Once litigation is filed, it becomes adversarial. Assuming we have a good case (and we don’t usually advise our clients to file unless we are pretty sure we’re going to win), there will be a number of tools at our disposal under California law. These tools vary depending on whether we’re trying to collect from a business (e.g., LLC, corporation) or an individual. The most common technique we use is a bank levy, which is possible as long as we know where the debtor banks (we should know this as long as the debtor made a payment to the client in the past). Since most debtors will be unaware that a bank levy has been placed, they won’t remove their funds from the bank account, and we will usually be able to obtain the debt owed.
In appropriate cases, we’ll also attempt an account receivable levy. If our client knows which customers owe the debtor money, then we can intercept those accounts receivable. For example, if company X owes our debtor $50,000, then we can serve a writ and a levy on company X and order them to pay our customer. We’ve satisfied a large number of balances in this way, without the debtor even being aware of what is happening. The element of surprise is used to our advantage.
A less common technique is to use a real property levy. If we’re dealing with an individual or business that owns residential or investment property with sufficient equity, then under California law, that property can be foreclosed upon or sold in order to satisfy a judgment. In my 30 years’ worth of practice, I have done a number of real property levies, but the debtor almost always pays before we have to sell their home or investment property; the simple threat of doing that is usually enough to compel the debtor to pay.
Another method of obtaining a judgment is through wage garnishment. This is used with individuals that are W-2 employees. In essence, the employer is served with an order to forward a portion (usually 25 percent) of the debtor’s gross wages in order to satisfy the judgment. We recently collected a judgment for a client from the guarantor who had been running a restaurant. Since the restaurant closed, the corporation that ran the restaurant wasn’t that strong. However, the guarantor was still employed, so we pursued a wage garnishment through his new place of employment. Over the course of about nine months, we collected the judgment with interest and attorney fees.
What Is The Likelihood Of Our Business Actually Recovering Money From A Debtor?
In my experience, it’s likely that we will collect from a business or corporation that is still in operation. If there is a personal guarantor, the likelihood of collecting increases, because an individual can’t just shut down like a business; even once they pass away, their assets are collectable.
Each case is different. Prior to starting a case, we will discuss the best strategy for moving forward. We recently handled a case where the client had been using a different attorney. They obtained a judgment in 2009 and, in California judgments are only valid for 10 years unless they are timely renewed. The client came to us about six months prior to the end of the 10-year period during which his judgment would be valid. We promptly renewed the Judgment. Had the client waited much longer, the Judgment would have been unenforceable.
Despite the fact that so much time had gone by, we were able to locate a bank account for the debtor and levied on the account. We collected about 80 percent of what was owed at that time. This brought the debtor to the table and he paid us the rest of the judgment. In California, judgments accrue interest at 10 percent per year, so that judgment went from $25,000 when it was entered in 2009, to over $50,000 when we collected it. It was a good win for our client.