Moringello__Bankruptcy__Spring__2012
Collection Without Courts
1. Leveraging
a. Debtors
i. They decide when to pay, which bills to pay first and whether to pay at all
b. Creditors
i. Face decisions about how to collect
1. They try to determine how to make it more beneficial or less costly for the debtor to pay the money owed
a. Means to enhance the leverage with the debtor in order to increase the likelihood that the debtor will repay the creditor
ii. Leverageà secured vs. unsecured.
1. Secured gives greater incentive to the borrower to meet his payments
iii. Loss reductionà the security can be sold and proceeds applied toward the loan balance
iv. Collateral Controlà prevent the applicant from obtaining an additional loan on the property from another institution
c. Ordinary civil and criminal laws are not suspended for debtors and creditors engaged in a collection struggle
d. Many creditors are unlikely to use courts to collect because litigation costs too much
i. There is also the threat that one party will get nothing
ii. The debtor will be judgment proof
1. That available assets are exempt or encumbered
e. Collection laws
i. Boundaries between debtors that try to evade paying and creditors who are determined to collect
2. Indirect leverage in the legal system
a. Shifting the burden away from the creditor and onto some other entity in order to entice the debtor to pay
i. Ex-spouse who doesn’t pay child support can be jailed
3. The credit information process
a. To maximize this leverage creditors have to have some where inexpensive to turn to
i. Ways to track and report credit behavior
ii. Identify creditors that are unlikely to pay
1. Often encourages other debtors to pay back their earlier debt
iii. Debtors only deal with the credit reporting service once they have been denied credit
1. Dispute is between the accuracy of the information supplied
a. Whether in fact the debt was actually owed by the debtor
2. The credit reporting agency cannot defend itself by blaming the creditor
a. Both become responsible for the error and are usually co-defendants in a lawsuit
b. Creditors can make credible threats in denying future credit have the ability to increase their leverageà remove other avenues for the debtor to turn to
Collection Remedies
4. Important rule outside of Bankruptcy
a. First in time, first in right
i. There is no pro-rata sharing outside of Bankruptcy
ii. Your first in time claim will be paid before anyone is able to get anything
5. Introduction to judgment collection
a. Steps the creditor must follow
i. Establish that the debt is owed
1. May involve a complex trial or the creditor may obtain a default judgment against the debtor
ii. Get a judgment against the debtor
1. A creditor cannot grab property of the debtor unless they have an interest in the property and have a lien on the property
6. Judicial Liens {involuntary liens that are available to creditors who have obtained a judgment against the debtor}
a. The Judgment
i. This document gives nothing to the creditor. No interest and no priority in any of the debtors property or income
1. The creditor remains unsecured until an execution has been obtained by the creditor
a. The judgment itself creates a lien on the debtors interest in real property within the jurisdiction of the court
b. To get personal property the court will have to issue a writ to the sheriff who will go out an levy personal property
2. At this point the creditors position has changed to where the judgment against the debtor has become indisputableà Liquidated
b. Post judgment collection remedies
i. The creditor wins, now how do they get paid
1. The debtor, who loses, will not be willing to pay you
a. Therefore the creditor gets rights in a debtors property that the creditor did not have before by following certain procedures
2. After going through this entire process the debtor may not have any property that is available to be seized after this very expensive process
c. ENFORCEMENT OF INVOLUNTARY LIENS (NON-CONSENSUAL LIENS)
i. The collection process begins with a “Writ” or a “Writ of Execution”
1. Execution writ
a. AKA a writ of attachment
i. Order the sheriff to look for non-exempt property, to seize it, sell it and to pay the proceeds to the creditor until the creditor is paid in full
1. Property NOT subject to the writ
2. Exempted property/Judgment proof
a. There may be some property that the sheriff will not be able to get to
b. If you owe the full amount of the debt
i. The sheriff gets nothing for seizing the property
ii. May not be very enticing to go after the property
3. Real Property
a. Since real property can never be hauled away, the sheriff will post a notice of seizure and/or sale on the property
2. “Levy”à Seizure of the property
a. Once the sheriff has levied on the property, the creditor becomes a judicial lien creditor
7. OTHER WAYS TO ENFORCE A JUDGMENT
a. Turnover Orders
i. Another way to enforce a judgment
ii. People tend to have property all over and do not have assets in tangible assets which tends to frustrate the collection efforts
iii. Turnover statutesà
1. The debtor can be required to turn over property that he possesses or property that is not even in his control
a. The debtor can go to jail if he doesn’t comply
2. Very advantageous for the creditor
a. All they have to do is get the correct information about the asset
b. Examine the debtor under oath , having him testify as to the property’s whereabouts with the threat of going to jail
iv. Gerdes v. Kennamerà 3 turnover orders were issued to assist the Δ in collection of a judgment, stock in a company that would help to satisfy the 900k debt. The P was required to turn over documentation of his ownership in the property. P argued that he could not turnover the paperwork because he could not force his wife to sign the paperwork
1. Does your state allow you to grab the property?
a. Since the property was in Mexico
ng a lien on the property}
i. These liens come by operation of law without the creditor filing a lawsuit
1. The lien attaches based on the statute typically when the credit is extended
2. State law also creates liens in favor of certain creditors
3. Artisan’s lien
a. Lien in favor of anyone who repairs personal property
b. Allows a garage mechanic to keep a car until the bill has been paid
4. Mechanics Lien
a. Real property
i. If the lien is not paid the repair person and foreclose and force the sale of the property
5. Trust fund statutes
a. They make the debtor a trustee of certain property for the favored creditors
i. The creditors are beneficiaries of the trust, which allows them to get priority in that property
g. Property exempt from the collection process
i. Each state has its own rules about protecting property from seizure
1. Family home, household goods
h. A debtor can never be protected against a secured creditor
i. When a debtor signs a security interest or a mortgage, the debtor waives the right to exempt the collateral
1. The exemption only comes into play if the debtor owns the property outright or has equity in excess of the liens
i. Collection in other Jurisdictions
i. Full faith and credit disclosureà requires that each state recognize and enforce the judgments of sister states
1. Subject to provisions
a. Foreign courts require that the US have reciprocity which in many cases they do not have
j. The struggle amongst creditors: Priorities
i. The first creditor to levy on the piece of property will have the right to be paid in full from the sale of the proceeds before any other creditor gets a dime
1. PERFECTION
a. The key date is who made some legal move first
b. The state in which the creditor reaches when the interest in the debtors property will prevail over subsequent interests
i. Judgment Creditorà Execution
ii. Secured and Mtg creditorsà Filing of the interest in which others are given notice
ii. Unsecured Creditor vs. Unsecured Creditor
1. The first to levy on the property wins
a. The levy date is not always the date to determine priorities
i. In many states it is the date that the levy was delivered to the sheriff
