Simply being a real estate investor, a landlord or the owner of a few real estate notes makes you a creditor. Being a creditor isn’t a bad occupation until the customer stops making payments. While nobody wants it, as a landlord or note holder you will sometimes have to seek a judgment to collect what you’re owed.
When a debt goes into default
So what’s the next step when they don’t pay? When a debt goes into default, the first step (although not legally required) is to regain control of your property or collateral. When this happens, several questions come up:
- What about the shortfall the debtor still owes me?
- What recourse do I have to regain control of my property?
- What do I do now?
- More importantly, what should I do?
These are all fair questions, and there are solutions, but you must first educate yourself. Unless you have a lot of experience in collections and judgments, the idea of pursuing one can be scary. Even the most sophisticated investors usually hire an attorney to oversee the process, but even then, the investor should understand the process and the options.
An old Texas banker once gave me some very good advice: “Son, the best time to worry about a loan is before you make it.” He meant that you need to feel comfortable with the borrower and his ability and willingness to repay. But I think he had a deeper meaning, too: you need to know your options when the customer doesn’t pay.
Anyone who has done a large volume of transactions, or has been a creditor long enough, has dealt with defaults. Some of these investors have pursued the shortfall (the deficiency) into judgments against the debtor. Other investors buy only delinquent debts, because they know how to collect on judgments. That’s the power of knowledge!
Getting a judgment and finding assets
Say a tenant or a note payor owes you money and hasn’t paid. What are your options for collecting that debt, plus late fees and your legal costs? The easy way is to forget the debt and walk away. Or you can exercise your rights as a creditor, sue on the debt and obtain a judgment against the debtor.
Below are some of the options available once the court has awarded you a judgment. They aren’t all-inclusive; they’re meant as a brief overview of collecting on a judgment. Throughout the process, remember that your key leverage in collecting any judgment is to locate and seize the debtor’s assets. Once you know what the debtor owns, you can proceed accordingly.
File an abstract of judgment
An abstract of judgment is a copy or summary of a judgment that, when filed with the appropriate public office, creates a lien on the judgment debtor’s nonexempt property.
Any time after you have been granted a judgment, you can file for an abstract of judgment. For the judgment to be enforceable against real estate, a judgment lien must be recorded in each county where the debtor has an interest in real property. The abstract must state the amount still due as of the date it was issued. To protect your position, it’s usually wise to file the abstract in every county where you think the debtor may own any interest, including partial ownership, in real estate or businesses.
Once the judgment has been recorded in a county, normally for 30 days, you basically have two choices:
- Wait until a property the debtor owns is sold. A sale requires clear title, and since your lien is on the property, it will have to be paid off at closing.
- Pursue seizure of the debtor’s assets by foreclosing on his interests in real property. State laws differ, but this is usually the process.
How the type of ownership affects your lien
It’s also important to know how the debtor took title to the property your judgment is attached to, and in what order the documents were recorded.
- Tenancy in common. The judgment lien attaches to the debtor’s interest in the property. In most cases it stays even if the debtor transfers the property into someone else’s name.
- Joint ownership. The lien attaches to the debtor’s share and remains enforceable, even if the property is transferred to a third party. However, a judgment attached to jointly owned property may be erased if the debtor dies.
- Community property or tenancy by the entirety. When the property is owned by a married couple, the lien attaches to the entire property and is enforceable against it, even if it is transferred to a third party.
Writs of execution and garnishment
Writ of execution. State laws differ, but usually after the 30th day from the date of the judgment, the creditor can obtain a writ of execution from the court. The writ lets a sheriff, constable or other appointed officer seize the debtor’s nonexempt property and hold an auction. Your judgment is then paid from the proceeds of the sale.
Writ of garnishment. Again, state laws vary, but in most states a writ of garnishment can be executed 30 days after the date of the judgment. To use it, you will need information such as the debtor’s employer, bank accounts and other liquid assets. Identity theft laws may make this harder to gather, but once the writ is executed, the court garnishes the money and pays it to you. State statutes set maximum amounts that can be collected at any one time, and you can only garnish disposable earnings.
Collecting a commercial judgment
A commercial judgment is handled in many ways like a personal one. If you can locate business assets such as cash, inventory, accounts receivable, real property or other tangible property, you can seize them.
The first step is to determine who is responsible for the debt. The responsible party can be a proprietorship, partnership, limited partnership, limited liability partnership, corporation or limited liability company. Look for personal guarantors, undisclosed principals and anyone who signed the contract.
You can hire a private detective or a specialized researcher to do this, or do it yourself. If you do it yourself, the local court clerk can help you search for all liable owners. Depending on the type of business, you will also want to search the records of the state comptroller’s office and the secretary of state’s office.
Once the responsible parties are established, use the same collection methods described above. Again, an abstract of judgment can be filed in every county where you think the debtor or the responsible parties hold an interest in property. Personal homesteads are exempt from seizure.
Getting legal help
Enforcing a debt can be challenging even for the most experienced creditor, and to the average investor it can seem impossible. States have, however, passed laws to protect people who are owed money or assets and aren’t being paid. If you are not being paid under the agreed terms, take advantage of your state’s judgment laws and collect proactively.
As mentioned earlier, it is wise to hire a lawyer to help you obtain judgments. It takes time, patience and sleuthing skills to reach a successful outcome. Handled properly, assets you thought were lost can be recovered. It is not insurmountable!
This is not intended as legal advice; it is presented to help you understand your opportunities. In the end, always seek legal advice in your state for the best plan of action in your particular circumstances.
