On the Collections Page, I address issues from the perspective of the person who owes the money, here in Debtor-Creditor Litigation, we go from the side of the person who is owed the money. The term "Debtor-Creditor Litigation" is used to refer to an attempt to collect a debt by the person or company who gave the credit/service or property (can be consumer/residential or commercial.)
Debt falls into two categories; secured and unsecured. With secured debt, the borrower, or debtor, pledges to secure payment of the loan. With unsecured debt, there is no property or "collateral" pledged to secure the loan. If a loan is in default, the creditor has to right to collect from the borrower, and may use any of a number of methods to do so. Foreclosure, a method of collecting amounts owed on real property, follows strict statutory procedures. The repossession of secured personal property usually follows the state Uniform Commercial Code (UCC). To collect an unsecured debt, the creditor may have to hire a collections agency or file a lawsuit.
If you're collecting a secured debt, you probably need legal help. You shouldn't try to repossess equipment, for instance, unless you fully understand the law in this area. Hiring a reputable and bonded repo company is one option. Another is to hire an attorney and use the courts. Likewise, if you're trying to foreclose on a mortgage, you'll need the expert assistance of an attorney.
You can turn over an unsecured debt to a collection agency, which normally asks for 30 to 50 percent of the collected debt and expenses. But, if you are owed a lot and you believe the debt is collectible, hire an attorney. With unsecured debt, or when the collateral is not enough to pay the debt and out-of-court attempts don't work (payment plans or compromise), you'll have to bring suit. Otherwise, an unsecured creditor generally can't take action to collect without the debtor's consent.
The creditor usually can't begin collecting until a lawsuit is filed and a Judge enters a judgment against the debtor. A secured creditor can ask the court for permission to retake its collateral prior to judgment being entered (in a procedure called ("replevin") as long as that collateral isn't real estate. Otherwise, the debtor has the opportunity to respond (usually within 20 days) to the creditor's lawsuit and is entitled to a trial to prove that the property should not be returned.
If a debtor doesn't respond, he or she is in default and judgment can be entered. Once there's a judgment, an unsecured creditor can seize (execute upon) the debtor's assets. However, many of the debtor's assets are exempt from execution. In most states, exemptions include:
- Some equity in the home
- Some Equity in a car.
- Most Clothes
- Non-valuable home furnishings
- ERISA-governed pension plans are also exempt under federal law
- Part of their income.
If the debtor is owed money by a third party, such as an employer or bank, the third party can be forced to pay the creditor instead of the debtor through a process called garnishment and levy. Most states only allow creditors to seize one quarter of wages, though. Texas, for example, allows no wages to be seized.
The bottom line on collecting unsecured debts is this: If you are a creditor and you are convinced the debtor has few non-exempt assets, it may make sense to pursue some kind of settlement and to try to get collateral to secure the new deal. Also, if you are a creditor, and the person even suggests bankruptcy, be careful.