Time is On Your Side: 4 Tips for Collections in a Recovering Economy
Despite the constant reports of rising foreclosure rates and bankruptcy filings, the news world was abuzz last week about the report from the National Bureau of Economic Research (NBER) that the Great Recession had ended…in June 2009. This surely came as a surprise to loan officers and small businesses everywhere who are seeing their fair share of loan defaults and increasingly uncollectable accounts receivable.
Anticipating this response, the NBER explained that, while the economy had not yet returned to operating at normal capacity, the worst was behind us. While this good news doesn’t put money into hands today, here are some things any creditor should bear in mind while we wait for the economy to fully recover.
There’s time to be patient. In Tennessee, the statute of limitations for collection on an unpaid debt is six (6) years, pursuant to Tenn. Code Ann. § 28-3-109. Then, once you sue and obtain a judgment (within six years from the date of the default), your judgment is valid for ten years, pursuant to Tenn. Code Ann. § 28-3-110. Plus, if your judgment remains unpaid at the end of the ten years, Tennessee judgments can be renewed pursuant to § 28-3-110 for another ten year period.
Don’t wait to act. In some instances, it may make sense to take no action on unpaid debt. Maybe the customer is a company that has gone out of business and has no remaining assets, or maybe they’ve filed a liquidation bankruptcy. This is where you make the “don’t throw good money after bad” decision and possibly decide to write this debt off.
But, remember, the first creditor to obtain a judgment is the first in line to seize assets. Granted, you could be the first in line and discover there are no assets, but you should nevertheless record your judgment as lien in the real property records. For less than $25 in filing fees, a creditor can record a certified copy of its judgment in any and all Tennessee counties where the debtor owns real property, and that judgment becomes a lien on any real property owned by the debtor.
Even if they don’t have any equity in their property today, the situation could well be different in ten years (judgment liens remain valid as long as the underlying judgment is valid). What’s more, your lien’s reach will capture any real property they obtain during the life of the lien. In the end, sooner or later, your debtor will have to deal with you, whether it be as part of a purchase of new property, a sale, or a refinance.
Bend, don’t break. Sometimes, it’s important to recognize when a debtor truly lacks any assets to pay toward your debt. When this is the case, aggressive collections—whether it be seizing a work truck or all funds out of a bank account—may put that debtor out of business and, possibly, into a bankruptcy filing. A judgment creditor can take depositions and request financials from their debtor, and this information may assist you in determining whether they aren’t paying anybody…or just aren’t paying you.
Bankruptcy doesn’t mean the process is over. If your debtor does file a bankruptcy case, there’s still a chance of monetary recovery. In addition to the benefits to the debtor, the secondary point of the bankruptcy process is to maximize return for creditors prior to granting the debtor a discharge of his or her debts. But, in most instances, a creditor in bankruptcy only receives pennies on the dollar in the process.
Keep in mind, however, the success rate in Chapter 13 bankruptcy cases (where debtors repay a percentage of their debts over 3 to 5 years) can be as low as 20%, meaning that most of those cases end with a dismissal. A dismissal is good for a creditor, because there is no discharge of the debt. Instead, the full amount remains due and owing. Debts are eliminated only when debtors receive a “discharge.” That’s an important distinction to know.
Finally, remember that a bankruptcy discharge only discharges “debts”—not “lien” rights. So, if you’ve already obtained a judgment and recorded it as a lien, then your lien on the debtor’s property survives the bankruptcy discharge. As a result, even though you can’t collect your debt, you can enforce your lien in the event of an attempted sale or refinance.
In the end, collection is a process that rewards the patient, especially in a recovering economy. But, a successful creditor must be prepared, and being prepared means having a valid judgment in place and exhausting all enforcement remedies before giving up. We all hope that the reports are right, and, if they are, the steps you take today will help make sure you’re paid in the future.
David M. Anthony practices with Bone McAllester Norton PLLC in the firm’s Creditors’ Rights practice group, and he regularly writes about issues impacting bankruptcy, judgment collection, and lien litigation at his blog, Creditors Rights 101, www.creditorsrights101.com.