Many small businesses extend customer credit, which may mean dealing with unpaid accounts. You might choose to sue on the outstanding account and obtain a court judgment against the debtor.
Many people assume that once a judgment is obtained, the outstanding account will be paid. In fact, it is only rarely that a debtor will quickly “cut a cheque” after a judgment. More commonly, you will have to take additional steps to enforce the judgment. Many creditors are surprised to learn that the power of the judgment can be quite limited.
The most common and effective enforcement options available to a judgment creditor are:
1. garnishment; and
2. seizure of property under a writ of execution.
Garnishment is the confiscation of money owing to the debtor by a third party. Examples would be garnishment of wages owing to the debtor by their employer or garnishment of the debtor’s bank account.
Garnishment can be cumbersome and costly. The money owing to the debtor is “seized” by serving a Garnishee Summons on the third party. The Summons requires the third party to make the payment into Court rather than to the debtor. You need to repeat the process every time a new payment is due to the debtor (for example, every payday).
Garnishment is limited by the knowledge you have about the debtor. You do not want to start the process only to find that the debtor was not owed any money by the third party, or that you missed the debtor’s payday. To be effective, you must have information such as where the debtor works, when they are paid, or where they bank.
If you do not have this information, there are preliminary “fact-finding” steps that a creditor can take, but these steps will mean extra costs and will reduce the amount ultimately recovered.
Another notable limit on garnishment is debtor exemptions. For example, a portion of the debtor’s wages will be protected from garnishment to allow the debtor a minimum level of income to meet necessary expenses.
A writ of execution allows you to seize property of the debtor. The writ is enforceable against what is known as “personal property”, such as vehicles or recreational equipment. You can request the assistance of the sheriff to seize and sell the debtor’s personal property. As with garnishment, the effectiveness of this option is limited by your knowledge about the debtor’s property.
A writ of execution is also enforceable against “real property” (land and buildings) owned by the debtor. Theoretically, you can force a foreclosure of the property, but only if the sheriff has investigated and found that there is no personal proprty to seize.
Writs of execution are also subject to exemptions. This is especially the case in the agricultural setting, where the debtor’s homestead and equipment reasonably required for the farming operation are exempt from seizure.
When seizing property pursuant to a writ, there are often other creditors that take priority to you (for example, a bank that has a security interest against a vehicle) or creditors that have an equal right to share in the proceeds (like other writ holders). At best, you will have to share the proceeds and may not recover enough to cover the costs of the process. Worse, you may not be entitled to any of the proceeds.
In light of these limitations, many judgment creditors simply register the writ and then wait until the debtor wants to sell the property, at which time the debtor has to deal with the writ. This approach has the obvious advantage of minimal cost. However, it can take years to see any results.
The other way that this “wait and see” approach may get results is that registration of the writ shows up on the debtor’s credit report. If the debtor eventually wants to restore their credit rating, they may be motivated to pay out the judgment.
Recovering an unpaid account is more than just obtaining a judgment in Court. It often involves significant time and money to pursue enforcement and the enforcement options have their limitations. The clear lesson is to do everything you can to prevent collections problems; employ smart lending practices and maintain a high level of customer satisfaction.