Judicial Tools Used in the Commercial Collections Process

Judicial Tools Used in the Commercial Collections Process

On Behalf of | Jan 14, 2020 | Firm News

Parties who are owed commercial (business) debt have several judicial tools that can be used both before bringing a lawsuit and after winning a lawsuit over the debt.

A party seeking to collect money owed but not yet paid from a commercial business may choose to settle outside of litigation or file a case in court. Settlement offers parties more flexibility to structure payments—or to pay less than what is owed—and is also cheaper overall. But for many parties that are owed money for a good or service (lenders or creditors, essentially), settlement is not an option. If that is the case, those parties will seek relief in court. With the help of a skilled attorney, a creditor can prevent assets from disappearing and collect on the debt once a judgment is issued.

Prejudgment Writ of Attachment

A “prejudgment writ of attachment” is a filing that asks a court to create a lien (or legal interest) in another person’s or entity’s property. The court creates a lien to “attach” the lender to the debtor’s legal interest in property such as money or real estate as a way to guarantee funds to pay off the commercial debt. The court’s order forces the debtor to maintain property and assets so that after any proceedings concerning the debt, including trial, the debtor can pay off the loan to the creditor. This procedure developed to prevent debtors from selling, hiding, or destroying assets in an attempt to avoid paying loans or judgments.

A lender can file a prejudgment writ of attachment against a partnership, a corporation, an LLC, or a person. California and other states have set up an initial hurdle to using this tool: the creditor must post at least a $10,000 bond before seeking a prejudgment writ of attachment to prevent “wrongful attachment.” Thus, the creditor must be serious and fairly confident that the borrower owes him or her money.

A prejudgment writ of attachment against a partnership, corporation, or an LLC needs to be based on a contract. A prejudgment writ of attachment against a natural person needs to be both “commercial” (a business transaction) and based on a contract.

Whether the prejudgment writ of attachment is against a business entity or a person, the creditor must establish two elements to succeed on the writ of attachment. First, the creditor must establish it is more likely than not he or she will win the judgment. To do this, the creditor uses evidence from witnesses, documents, and communications (text messages and emails) to show the claims related to the debt are valid. Second, the creditor must establish it is more likely than not the lender will suffer “irreparable harm” if the prejudgment writ of attachment is not granted. Typically a lender shows this with evidence that the debtor has assets and is selling them, hiding them or otherwise destroying the assets so the lender’s debt cannot be repaid.

Postjudgment Remedies

A creditor who wins a court judgment, which is an order directing the borrower to pay the creditor, may be able to collect on the judgment directly. But frustratingly, debtors are often reluctant or unwilling to pay despite a court order. A creditor may seek to “examine” the debtor in court to learn of any undisclosed assets that may be used to pay the judgment. The creditor may ask the court and the DMV to take action to suspend a party’s driver’s license if the parties’ dispute concerned an auto accident. The creditor may also ask the debtor’s professional license, if he or she has one, be suspended if the conflict arises from professional services the debtor provided.

In general, however, a creditor will seek a “writ of execution” to direct the county sheriff to seize possession of the debtor’s assets. Assets can include real property, a bank account, or wages. For real property, the sheriff would seize the assets and then sell them at auction to pay the court judgment. The creditor would seek a writ of execution in every county where the debtor does business or has assets.

To levy a bank account, the creditor must provide the name and branch location of the debtor’s bank or financial institution. An investigator may be needed to ascertain this information, although some creditors request it early on when they create their initial contracts with lenders. The plaintiff prepares a “writ of execution form” for the court. The court clerk then issues an official “writ of execution” that authorizes the county sheriff to go to the debtor’s bank with a form of notice called “notice of levy”. The form tells the bank and the debtor that the sheriff will soon take control of certain property, such as bank assets, in certain amounts. The debtor can release their property by paying the money judgment or by claiming an exemption.

Wage garnishment also requires a writ of execution form and an official writ of execution issued by the court. The plaintiff must provide the name and location of the debtor’s workplace and information showing the debtor is eligible for garnishment. Certain people, such as those who are self-employed, whose pay is already subject to other garnishment (such as for child support), federal employees, active military, or the very poor, cannot have their wages garnished. Wages are garnished based on a percentage of total wages; by law, the maximum wage garnishment is 25 percent. The sheriff takes the official writ of execution to the debtor’s workplace and instructs the employer to withhold the appropriate amount of wages.

For more information on best commercial debt collection practices, contact attorney Ron Slates today.