LEGAL TOOLS AVAILABLE FOR INVOLUNTARILY COLLECTING DEBTS
By Andrew J. Steil

April 2009

Late to bed and early to rise, work like hell and advertise. These words describe the motto of many successful businesses. However, there are times when no matter how hard we pour our sweat, hard work and lives into a business that we may have problems paying or collecting receivables. Whether a business owes you money or you owe a business, it is important to be prepared and know the legal tools available for collection of a debt.

The purpose of this article is to introduce you to three of the primary legal tools used for collecting debts after a judgment has been obtained. This article applies only to “unsecured debts”, which means the debt is not secured by a mortgage, security interest, or other lien.

Collection Lawsuit

Before using legal tools for collection, it is usually necessary for a creditor to initiate a lawsuit against the debtor. A lawsuit is normally initiated through personal service of a summons and complaint upon the debtor, or someone who resides with the debtor. In the summons of a lawsuit, it states the debtor has a certain amount of days, usually 20, to respond. If the debtor does not send in a written answer or dispute, the debtor is in “default”. Default means the debtor has not responded to the summons and the creditor is entitled to a judgment. A judgment is a formal decision by a court on a particular case. In a collection lawsuit, a judgment will usually order the debtor to pay the creditor a set amount of dollars.

A difference between a collection lawsuit and other lawsuits in Minnesota, is that if the dollar amount owed to the creditor is set by contract or otherwise, the creditor generally is not required to make a formal appearance before a judge, but rather can obtain an “administrative default” judgment. An administrative default judgment occurs when the attorney for the creditor sends certain documents to the court requesting judgment “administratively”, instead of requiring a “formal” motion or appearance at a hearing. If the debtor fails to Answer or provide a written dispute to the summons and complaint, and the necessary documents are provided, the court will generally grant the administrative judgment, and return notice of the judgment to the creditor’s attorney. All of this is accomplished without the attorney leaving his/her office and at a significantly reduced cost to the creditor.

For purposes of this article, we will only discuss post-judgment collection tools. While involuntary collection tools exist prior to obtaining a judgment, they are beyond the scope of this article. The three primary tools used by creditors after obtaining a judgment are: 1. Garnishment; 2. Personal Property Execution; and 3. Judicial Foreclosure.

Garnishment

A garnishment is a tool used by a creditor to have money that is owed to a judgment debtor redirected, or diverted to the creditor to help pay a judgment. In other words, the creditor can serve a garnishment on a third party who owes money to the judgment debtor ordering the third party to pay the creditor instead of the judgment debtor. There are three primary ways garnishments are used: 1. Wage Garnishments; 2. Financial Institution Garnishments; and 3. Third Party Garnishments.

           1.         Wage Garnishment

If your judgment is against an individual you can garnish his/her wages through a wage garnishment. A wage garnishment is a simple tool and relatively cheap for an attorney to conduct. The wage garnishment lasts for 70 days, which equates to approximately 5 pay periods for the debtor. Following the expiration of the 70 day period, an attorney simply mails out another, nearly identical wage garnishment to continue garnishing the wages.

A wage garnishment is modestly effective because a creditor can only obtain 25 percent of a judgment debtor’s earnings, and the 25 percent can only be obtained if the judgment debtor makes over a certain, minimal income. Additionally, if the debtor is on public assistance, his/her wages are completely “exempt” and cannot be garnished.

           2.         Financial Institution Garnishment

If the judgment debtor has a bank account, the funds in it may be garnished. The process of taking money out of a judgment debtors bank account by a creditor is known as a financial institution garnishment. Upon service of a garnishment summons, a financial institution must “freeze” or hold the money of the debtor for payment to the creditor. If there is no objection to the garnishment and the statutory procedures are followed thereafter, the financial institution will withdraw the money, generally up to $10,000.00, in the account and mail a check to the judgment creditor. Similar to a wage garnishment, a financial institution garnishment is simple and relatively cheap.

           3.         Third Party Garnishments

Third Party Garnishments are very similar to a financial institution garnishment but instead of dipping into the judgment debtor’s bank accounts, the money is redirected from a third party. In other words, if the third party owes the judgment debtor money, a judgment creditor can intercept or redirect the money away from the debtor and to itself. Similar to a financial institution garnishment, the third party must mail a check to the creditor instead of the debtor. Additionally, if you are the third party being served with a garnishment summons, do not ignore it because you could be sanctioned, including having a judgment entered against you for the same dollar amount as the judgment against the debtor.

Personal Property Execution

Personal property execution refers to the process of ordering the sheriff to seize a judgment debtor’s assets for resale to pay the judgment. The process for doing this can often be expensive due to towing and storage fees, as well as costs associated with investigating the assets of a debtor. Additionally, the sheriff will take a percentage of the amount obtained in the sale, which is normally 5 percent. Regardless, it may be a valuable tool to have the sheriff seize property, such as vehicles, boats, trailers, snowmobiles, etc. for resale. The proceeds from the sheriff’s sale are used to pay the judgment.

Real Property Execution

A judgment automatically creates a “judgment lien” upon all non-exempt real property owned by the judgment debtor in the county where a judgment is obtained or docketed. A judgment lien is a lien on real property that automatically arises when a judgment in entered. The amount of the judgment lien is equal to the dollar amount of the judgment.

A judgment may be docketed in other counties throughout the state to obtain a judgment lien on real property owned by the debtor in other counties. However, a judgment lien does not attach to exempt property, such as an individual debtor’s homesteaded property. Although there are dollar limits and special rules for judgment debtor’s spouses on homesteaded property, it is beyond the scope of this article.

If a judgment creditor obtains a judgment lien on non-exempt real property and cannot satisfy the judgment through a garnishment or personal property execution, it may execute on the real property by conducting an execution sale. An execution sale on real property is similar to a foreclosure, where the sheriff sells the real property to help pay the judgment. The proceeds from the sheriff’s sale are used to pay the judgment.

Conclusion

The above list is by no means exhaustive, and there are many traps associated with involuntary collections for the inexperienced or unwary. My hope is the tools above provide a quick look into the world of involuntary collections and help you better prepare for collection activity.

Andrew Steil practices in the areas creditor/debtor commercial collections, construction and litigation.

© 2009 Rinke-Noonan.

This article is a general discussion of legal issues and is not intended to be legal advice. We would be pleased to review the specific facts and law regarding any given legal matter.