Author: Steven E. Ernest, Esq.
What should you do if you find yourself a ‘sold out junior’, or the REO didn’t gather the full balance owed on your loan (even in this market)? What happens when the collateral is exhausted but amounts remain unpaid?
These unpaid amounts are referred to as your “deficiency balance.” As a lender, there are many formal and informal avenues to explore to recoup your funds.
Litigation to Pursue a Deficiency Judgment
If the informal options prove fruitless, a decision must be made: to sue or not to sue. If you decide against it, speak with your CPA about the best way to characterize the loss, close your file, and move forward.
If electing to pursue the borrower for a deficiency judgment, however, a complaint in the Superior Court for breach of contract (and common counts) is in order. This requires most of the same accomplishments of any lawsuit:
- Filing the complaint with the Court;
- Serving the customer; and
- Obtaining a judgment.
Several paths exist between service and judgment depending on the circumstances. Did the borrower, (now defendant), respond? If so, a bit of written discovery is in order, or perhaps a deposition, depending on the defenses raised. Next will come a summary judgment motion or a trial.
So long as your contract was properly formed and executed, you have an accurate account payment history, and there were no significant mistakes in the collection and foreclosure process, you should be entitled to a judgment for the full amount owed (deficiency balance), plus attorney’s fees, costs, and interest according to the default provision of your contract.
Now What?
Your judgment is a sheet of paper, signed by a Judge, indicating your borrower (now a judgment debtor) owes you money.
Now, what can you do with it?
It is often a disappointment to learn that a judgment for money is vastly different than actual money. You can’t take the judgment from the courtroom, ride the elevator down to the first floor, present it to the cashier, and have it paid. You’ll actually have to collect it.
Collecting the Deficiency Judgment
Demand Letter
This is an option you’ve likely heard before (supra). It is worth the price of a stamp to send a letter and a copy of the judgment to the borrower asking him to pay it, although it seldom works. However, because there is still a chance this avenue can resolve your issue without the need for further pursuit, it makes this option worthwhile in every circumstance.
Notice of Entry
You must provide formal written notice of the judgment to the borrower via mail. If your case was contested, your borrower has a few weeks to appeal, and the clock doesn’t start until you provide notice. If your borrower never appeared in the lawsuit, you have a judgment by default and your customer has six months to set that aside and contest it. The six-month period doesn’t begin until you send notice of the judgment (again, in the mail). Stamps are cheap – send these to every address you have for the borrower.
Collecting Judgment
Now comes the exciting part: collecting your judgment from a borrower who does not want to pay. During the contract period, you are tremendously limited by various collection practice regulations. Now, however, you are a mighty JUDGMENT CREDITOR!
Here are some options you have at your disposal:
Abstract of Judgment
These are simple two-page forms. Other than your judgment, you’ll want the social security number or driving license number of your borrower. Record these in every county where you think the borrower has (or might have in the future) interest in real estate.
The abstract stays of record for ten years. These will cost less than $100 to create, and about $50 to record. For ten years, if your borrower wants to buy, sell, or refinance real estate in the county where the abstract is recorded, they MUST pay you before their transaction will close. You need not do anything other than wait for a call from escrow. They will ask for a demand, which you will send, and you’ll be paid.
This is the best kind of fishing there is. The borrower will have long forgotten about you, but not the County Recorder and Title companies. You’ve built a great deal of leverage because the lien automatically encumbers all real estate in the county where recorded the very moment it is recorded. Nothing else is required. California has 58 counties: pick whichever you like (or all of them; there is no limit).
Bank Levy
Bank levies used to be difficult. In the past, you’d need to know the actual branch of which bank your borrower used. Now, banking is mostly centralized and there aren’t nearly as many banks.
The court will issue a writ of execution, which you’ll send to the sheriff with an instruction letter. The process is rather intricate but shouldn’t cost more than $1,000. The sheriff then serves the writ to the bank which, in turn, searches for accounts (and even safe deposit boxes) where your borrower has an interest. If there is any money in it, you get it all! The sheriff will collect it, hold it for a few weeks (while the borrower gets to file “claims of exemption” with the court – reasons he should get to keep some of the money), then you get it all.
Don’t expect this to work more than once. Most judgment debtors will close their accounts and move to another bank. However, nothing prevents you from getting multiple writs all at once. We recommend getting five and serving each of the five largest banks in California at the same time. We estimate that will hit 80% of banking customers in the state. Individual accounts, joint accounts, trust accounts … it doesn’t matter. If your judgment debtor’s name is one of those on the account, you get it all.
Wage Garnishment
For this one, you’ll need to know where the borrower works. Prime targets are government workers (DMV, teachers, CalTrans, and the police department). Folks make careers there and tend not to leave with the frequency employees do in the private sector. Much like the bank levy, you’ll get a writ of execution that the sheriff will take to the borrower’s employer.
Henceforth, you’ll get 20% of the borrower’s take-home pay until the judgment is paid in full (including interest and collection costs). You can expect a check from the sheriff every month until the debt is paid, or the borrower quits his job in protest.
Judgment Debtor Exam (JDE):
For the above options, you don’t need to know where your borrower physically is because that doesn’t affect your ability to move forward. Unfortunately, this option requires that you do.
You need to have a process server actually serve your borrower with the papers. A JDE is very similar to a deposition (which is taken during the litigation). The difference is a JDE comes with a Court Order to appear. If your borrower doesn’t appear for the JDE, the Court will issue a Bench Warrant. Law Enforcement doesn’t actively seek these out for enforcement, but some evening when your borrower is driving home from a nice dinner out and runs a stop sign – he is going to jail. The warrant will appear for law enforcement exactly as if he skipped bail on his murder charges. The JDE is typically taken at the courthouse. A reporter is not required but is recommended.
This option is more costly since you are paying for your attorney’s time as well as the court reporter for a transcript. Your borrower is administered an oath and is required to identify assets that you can use to satisfy your judgment. Ask where they work and banks (garnish and levy). Find out where they own real estate (abstracts), brokerage accounts, what inheritance they’ve received, and more.
Each of these remedies may lead to funds for you to use in satisfying your judgment. Even if they don’t, you are putting pressure on your borrower. At some point, hopefully, it will be easier for your borrower to pay you than it is for your borrower to play ‘cat and mouse’ with you. Then you’ve won.
Bear two points in mind when considering or collecting your judgment:
- You never lose the ability to settle your case. At any point, you can make arrangements with your borrower to pay installments or a lump sum.
- The fees and costs you incur are all added to the balance owed. Ultimately, your borrower is paying your collection costs.