Creditors have several alternatives or methods to collecting debts.
- “Extra-Judicial Remedies,” or remedies not involving a court proceeding
- Pre-judgment Court Remedies
- “Remedy by Judgement,” or court proceedings to collect a final court judgment
Additionaly, some creditors may have special rights to collect debts in the form of liens.
There are two common extra-judicial remedies to collect a debt
- A demand to pay the debt
Demand for payment. Creditors may contact the debtor by letter asking or demanding that the debtor make payment. For example, a creditor may use this method when a debtor fails to pay a credit card bill. However, because debtors may not respond to letters, creditors often transfer delinquent accounts to debt collectors. Debt collectors are businesses involved in the professional collection of debt. Some of their tactics such as sending dunning letters and making repeated telephone calls have raised legal concerns. A number of statutes regulate the activity of debt collectors and the collection of consumer debt.
For example, the federal Fair Debt Collection Practices Act (FDCPA) restricts the tactics debt collectors may employ to recover debt from a consumer. The Act:
- Limits the manner of contacting the debtor
- Restricts contact with third parties
- Prohibits abusive, misleading, or deceptive practices
Violations of the FDCPA entitle the debtor to actual damages, additional damages, and attorney’s fees and costs.
Self-help. This remedy to collecting a debt entitles the creditor to privately vindicate their rights against the debtor by taking the debtor’s property.
For example, assume a consumer buys an automobile on credit from X Corporation and defaults on the loan. In many states, X Corporation has the right to repossess the automobile provided that the repossession can take place without a breach of peace. Self-help is available in other situations where collateral is put up to guarantee a debt.
There are some constitutional limitations on the use of self-help. In some circumstances, courts have held that a debtor must be given notice and an opportunity for a hearing before the debtor’s property may be seized.
Pre-Judgment Court Remedies
A pre-judgment court remedy is a remedy available to a creditor that has started a lawsuit against the debtor but has not yet obtained a final court judgment. During this period, a creditor may be able to guard their interests by holding the debtor’s property in an amount equal to the debt. The pre-judgment remedy is extraordinary because the debtor’s property is seized before the court hears the merits of the case. Pre-judgment remedies are mainly used in cases of emergency. There are several pre-judgment remedies, a few of them are described below.
Attachment. Attachment is a court order authorizing the creditor to take the debtor’s property, either physically or symbolically, for the purpose of securing the debt, in the event that the creditor reduces their claim to judgment in a court of law. Attachment is a statutory remedy, and it varies from state to state. Attachment is restricted to special circumstances:
- The debtor is about to dispose of the property in order to commit a fraud against the creditor
- The creditor cannot serve the debtor with its complaint
- The nature of the claim is based on special grounds such as fraud
Attachment procedure varies from state to state. However, the order of attachment usually requires a hearing before a judge. If the statutory standards are met, the judge directs the order of attachment to the sheriff. For example, a creditor may use the remedy of attachment when the debtor has only a few assets and those assets are unlikely to be around if the creditor obtains a court judgment.
Replevin. Replevin is a remedy allowing a creditor to recover possession of personal property when the creditor has title to that property or a right of possession. For example, if a creditor has leased a computer to a debtor and the debtor fails to pay the monthly rent, the creditor may be able to take the computer prior to obtaining the final judgment because the creditor has legal title to the computer.
Special circumstances are necessary to use the remedy of replevin. In most states, because of due process requirements, a creditor may obtain an order of replevin from a court after the filing of a complaint, notice, and a hearing. The notice and hearing requirement is excepted in extraordinary circumstances such as the imminent removal or damage of the goods. In most states, the sheriff executes the order of replevin and turns the property over to the creditor.
Distraint. Distraint is a special remedy only available to creditors who are the landlords of real property. When a tenant’s rent is in arrears, a landlord may apply to a court for an order permitting the landlord to seize the debtor’s property such as furniture and appliances. If the creditor obtains a judgment for rent, the seized property may be used to satisfy the judgment.
Remedy by Judgment
If a creditor cannot protect their rights by request, self-help, or pre-judgment remedy then the creditor must obtain a court judgment. A court judgment is obtained after trial or by default if the debtor does not contest the case. The mechanics of obtaining a judgment in state court vary from state to state.
A debtor may defend against the creditor’s complaint and may file a counterclaim against the creditor if appropriate facts support a counter-claim. For example, a debtor who is being sued for payment of a bill for services rendered by an auto mechanic may file a counterclaim stating the repairs performed by the auto mechanic damaged the car.
If a creditor obtains a judgment against the debtor, the creditor must then enforce the judgment. A judgment by itself usually is not sufficient to collect a debt. A judgment may be enforced against the real or personal property of the debtor, but generally creditors are first required to seize and sell the debtor’s personal property. For example, state law may require the creditor to seize the cash in bank accounts, or personal property such as jewelry or a car, before enforcing a debt against real property.
Enforcement of the Judgment
A creditor may enforce their judgment against the debtor’s property by taking the debtor’s property in an amount equal to the value of the total debt.
Generally, creditors do not literally take the debtor’s property. Rather they use a sheriff or other official to take the property. The act of the sheriff taking the debtor’s property is called a “levy.” A levy has many forms of application. For example, a sheriff levies on real property by recording a notice of the lien in the real estate record system. The sheriff obviously cannot physically remove real property. In other cases, the sheriff may physically take the debtor’s property if it is easily movable personal property such as jewelry.
A creditor may levy against the debtor’s property as a pre-judgment and post-judgment remedy. A levy gives the creditor the following advantages in the pre-judgment stage.
- First, the creditor has rights in the property that has been seized. If the debtor sells or transfers that property, the creditor’s claim follows the sale or transfer.
- Second, the creditor establishes a priority position in relation to other creditors of the debtor. For example, if a debtor has many creditors, often all debts cannot be satisfied from the debtor’s assets. Creditors are paid from the proceeds of the debtor’s assets according to their priority position. The rule of priority ordinarily used to satisfy creditors’ claims is the “first-in-time rule.” That is, the earlier the creditor establishes its lien, the more likely the creditor will be in the top position to be paid.
- Third, the creditor has leverage over the debtor. A debtor has a powerful inducement to pay the creditor when the debtor is deprived of the property.
Sale of Property
A judgment is enforced by public sale of the debtor’s personal property. To bring the debtor’s personal property to public sale, a creditor obtains a court order specifying the property to be seized and sold. Generally, a court order does not specify the method of sale. However, state law generally requires that the sale be conducted to yield a fair price.
Some creditors may be able to enforce their judgments by forcing the sale of the debtor’s real property. However, this remedy is not uniformly available. In some states, creditors may be unable to foreclose against the debtor’s residence because the debtor’s home is exempt property. Of course, even in states that exempt the debtor’s home, the bank holding the purchase money mortgage may foreclose its lien. Foreclosure of real property, particularly the debtor’s principal residence, is a process regulated individually by the states.
A creditor also may use the remedy of garnishment to enforce judgement. Garnishment is a claim on the property of a third party owing a debt to the principal debtor. For example, a creditor may obtain a court order directing an employer who owes wages to the principal debtor to pay a portion of those wages to the creditor. A judgment creditor obtains an order of garnishment by filing a lawsuit against the third party. In the above example, third party would be the debtor’s employer.
If the creditor prevails, a court issues an order of garnishment. For example, a condominium association that obtains a final judgment against a unit owner for failure to make required payments might try to garnish the unit owner’s wages. There are many state and federal limitations on the use of garnishment as a remedy to enforcing judgement.