Leverage – COLLECTION WITHOUT COURTS
1. Formal debtor-creditor laws are important because of the impact they have on informal, negotiated debt collection process
a. Warren’s empirical study showed remarkably little use of formal collection process against consumers prior to bk (p. 6)
b. Main purpose of legal rules is that they provide leverage to one or the other party
a. Tension between what the law says about how hard you can squeeze a debtor and who can be first in line.
3. Types of leverage points:
a. Formal (Direct) leverage
i. Lawsuits – attempt to get a judgment
a. Might prompt debtor to file for bankruptcy
b. Risk you won’t win
c. Can be really bad PR
ii. Security interest in collateral
1. Some unsecured creditors will try to negotiate a security interest going forward if it looks like the debtor might get into trouble, offering a discount on the loan in exchange
a. Banks often hate this b/c it’s a real loss
2. If valuable to debtor, greater incentive to make payments
3. Collateral control – keeps debtor from taking loans from other institutions
4. Loss Reduction – Security can be sold and proceeds applied toward loan balance
b. Informal (indirect) leverage
i. Guilt – if friend or family member who stood by debtor
1. Depends on position person is in to embarrass you, make you feel bad
ii. Risk to social reputation: (Ex: Country clubs)
iii. Withholding of future services (Ex: Health insurance / Burial)
iv. Government statutes sometimes shift the leverage of the parties
1. Ex: Alimony payments: Ex-spouse who fails to pay court-ordered child support or alimony may be put in jail for nonpayment
a. This is enormous leverage to the family that is not given for most debts
i. Policy reasons: Moral, Protects the public purse, Widespread problem with enforcing alimony agreements.
ii. Child/spouse is an involuntary creditor
iii. Risk spreading: Ex spouses don’t have opportunity to hedge risk
2. Leverage only works for some
a. Professionals, people who can afford to pay will pay
b. For those who have no income or family resources, this is not an effective leverage point
3. A bank that hasn’t been repaid may notify the IRS for “income” from the forgiveness of debt
c. Benefits to informal collection (Most debts collected w/out resorting to legal process)
i. Expense of litigation
ii. Risk that debtor will be judgment proof or that creditor will not hold a valid debt
iii. Debtor might make payment from assets that would be exempt under formal process
Credit reporting — Fair Credit Reporting Act (p. 10) – Two themes: Giving debtor access to credit report information, and prescribing procedures to ensure accuracy. 15 USC § 1681
i. § 1681i – Procedures in Case of Disputed Accuracy
ii. § 1681m – Requirements on Users of Consumer Reports
iii. § 1681n – Civil Liability for Willful Noncompliance
iv. § 1681o – Civil Liability for Negligent Noncompliance
v. § 1681s – Administrative Enforcement
vi. Most disputes relate to the accuracy of the credit information supplied by the creditor-members (credit card companies, etc.)
vii. Debtors may complain that debts listed were not owed, that the amounts were incorrect, or that payments sent are not accurately listed.
viii. Fair Credit Reporting Act offsets some of the leverage that creditors gain by providing procedures when questioning accuracy.
4. Restrictions on Nonjudicial Collection
a. Usury laws – Set maximums outside of which debt was outrageous. No longer effective
Federal statutory controls on nonjudicial collection – Understand which practices are prohibited, which parties are controlled by the statute, the remedies for wrongful activities, and the amounts and kinds of resources needed by debtors to protect the rights established by the act.
c. Fair Debt Collection Practices Act (p. 15)
i. § 802 – Purpose – abundant evidence of the use of abusive, deceptive, and unfair debt collection practices by many debt collectors.
ii. § 803 – Definitions
1. Debt Collector – any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.
iii. § 804 – Acquisition of Location Information
iv. § 805 – Communication in Connection with Debt Collection
1. Communication with the Consumer – Debt collector may not communicate with a consumer in connection with the collection of any debt
a. At any unusual time or place or place known or which should be known to be inconvenient to the consumer.
b. If consumer is represented by attorney, then must communicate with the attorney
c. At the consumer’s place of employment if the debt collector knows or has reason to know that the consumer’s employer prohibits the consumer from receiving such communication.
2. Communication with 3rd parties – may not communicate in connection with the debt with anyone but the person, his attorney, a reporting agency, the creditor.
v. § 806 – Harassment or Abuse – can’t engage in conduct the natural consequence of which is to harass, oppress, or abuse any person in connection with the collection of a debt.
vi. § 807 – False or Misleading Representations – can’t use any false, deceptive, or misleading representation or means in connection with the collection of any debt.
vii. § 808 – Unfair practices – can’t use unfair or unconscionable means to collect or attempt to collect any debt.
viii. There is a requirement that collection agencies verify the accuracy of debt information and a restriction on the ability of collection agencies to bring lawsuits in for a far from the debtor.
ix. Heintz v. Jenkins P. 20: Lawyers may be subject to provisions of Fair Debt Collection Practices Act, too.
1. Act defines the debt collectors to whom it applies as including those who regularly collects or attempt to collect, directly or indirectly, consumer debts owed or due or asserted to be owed or due to another.
Collection Remedies – STATE LAW DEBT COLLECTION
1. Steps to collecting a debt under state law
a. Establish that the debt is owed: Judgment – judgment in itself is useless. No priority.
i. Liquidated Claim – The claim becomes indisputable by the debtor. That’s it.
b. Execution of the judgment: Note, creditor is unsecured until this is done!
i. Execution Writ: Orders Sheriff or Marshall to look for non-exempt property of the judgment debtor, to seize it, sell it and pay the proceeds to the judgment creditor
ii. Execution writ must be delivered to the sheriff (FIRST IN TIME = FIRST IN RIGHT)
iii. Sheriff’s Levy
1. Once Sheriff has levied on the property, creditor becomes a judicial lien creditor w/respect to that particular property
2. Sheriff sells the property and pays the creditor. Any remaining proceeds àdebtor
2. Alternatives to the execution process
a. Turnover orders
i. Judgment creditor gets the necessary information about an asset and can ask the judge to issue a turnover order, by which the debtor is ordered to turn over the property
ii. Debtor risks imprisonment for contempt if he does not comply
b. Judgment liens by recordation
i. Obtained by recording a judgment in the county land records where deeds of sale and mortgages are filed
ii. Minority of states also permit such liens on personal property by recording in the UCC
iii. Benefits of this:
1. Often the fastest and cheapest post-judgment collection step
2. Can pursue execution at leisure,
i. Secured creditor perfects when it records its consensual lien according to statute
ii. Purchase money transactions often involve a 20-day grace period during which the secured creditor may record its lien and beat any intervening unsecured creditors w/involuntary liens
1. If you make the grace period, you are deemed perfected when the deal was done
2. If you miss the grace period, you are deemed perfected when you perfect.
d. Judgment creditors and Secured creditors v. buyers
i. Governed by notice: generally, if secured creditor records after purchaser buys, secured creditor is out of luck and vice versa.
1. If someone has an unperfected judgment, and the debtor sells the car to X, X now wins and retains ownership of the car.
2. However, if X buys after a levy has been placed, X is out of luck.
e. Unsecured judgment creditor and secured party v. Trustee in BK
i. Because equality among creditors is the fundamental principle of bankruptcy, consensual and statutory creditors will face a rigorous testing of the legal soundness of their priorities. Competing Unsecured creditors
ii. Judgment creditors will usually be even more seriously threatened, to the point that the very existence of the bankruptcy system discourages the use of the judgment-execution process, because judgment liens are so routinely “avoided” in bankruptcy, nullifying all the diligence and expense of the execution process.
f. Inactive judgments may lose their vitality
i. Weaver v. Weaver Because dentist’s judgment was not revived following five year period, it lapsed and lost its priority to subsequent lien.
ii. Judgments may become disabled in 2 ways: Dormancy and limitations
1. Dormancy: Occurs when judgment creditor fails to seek enforcement of a judgment for a period of time.
2. Expiration of statute of limitations: Statute of limitations may run regardless of dormancy or attempts at execution – common period is 10 years
10. Pre-Judgment Remedies – while the judicial process goes on D may be putting assets out of reach.
a. Due process vs. Being able to satisfy judgment.
b. Pre-judgment protection for defendant-debtors falls into two categories:
i. Traditional protection under state law by means of special requirements that a creditor must satisfy before being able to get a remedy prior to obtaining a judgment; and
ii. Procedural requirements in the pre-judgment process that the SC has found to be necessary to ensure the defendant debtor due process of law.
c. States typically require:
i. A showing of need (i.e., that the putative debtor is decamping with its assets); and
ii. A bond, often in twice the amount of the value of the property, to provide a fund for the defendant’s damages if the pre-judgment remedy turns out to have been wrongfully employed.
d. The Supreme Court requirements can be summarized:
i. D’s property may not be seized without an order issued by a judicial officer (not a clerk) upon a factual showing of need.
ii. Once the property has been seized, the defendant must be given a hearing and a chance to get the property back very quickly.