Creditors would generally prefer to be able to collect a debt from a debtor simply by sending the debtor a bill and receiving immediate or gradual payment from the debtor. Unfortunately, not all debtors pay their bills on time, and some do not pay the debt at all. When a debtor defaults on a debt, the creditor has to decide how to best collect the debt.
Creditors who make the decision to file a lawsuit to compel a debtor to pay a debt may do so in order to preserve their rights. If a debt goes unpaid for a certain period of time, the debt can become unrecoverable through a lawsuit. This period of time is known as the statute of limitations and can be used as a defense by a debtor. Therefore, a creditor can file a lawsuit before the time is up in order to stop the debtor from raising this defense.
If the debtor chooses not to participate in the lawsuit, the court can automatically rule in the creditor’s favor, and grant a default judgement. Even if the debtor does not pay the judgement awarded in a lawsuit, the creditor can use the judgement to take other collection actions, such as wage garnishment.
The preservation of the creditor’s rights by avoiding a statute of limitations defense is one of many considerations that go into the decision to file a lawsuit. Another major concern is the cost of litigation to preserve the creditor’s rights. If the cost of filing a lawsuit and litigation to collect the debt is more than the debt, the creditor may decide to write off the debt.
In many cases, especially if the debt is small and it would cost the creditor more to try and collect the debt, a creditor may decide to turn the debt over to a collection agency. In some cases the creditor sells the debt to the collection agency for less than the debt owed.
It is more difficult to collect a debt that is unsecured if the debtor files for bankruptcy. A bankruptcy trustee usually pays off secured debts first, and then unsecured debt may be paid off for a fraction of what is owed. In some cases, unsecured debts are not paid at all. If commercially possible, creditors should ensure that all credit extended to debtors is secured by some collateral. Securing a debt can also be useful before a debtor files for bankruptcy.
A creditor can use a lien to foreclose or repose property that secures a debt and force its sale to pay the debt. Arranging a sale of repossessed property usually requires taking certain steps to ensure the best price is paid for the repossessed property. Before organizing a sale to recover a debt, the creditor should consult an attorney to ensure that they do not violate the debtor’s rights when executing the sale.
Contact Us for More Information
For more information on how you can best collect a debt with minimal costs to your organization and how to deal with debtor bankruptcy, you need to consult an experienced creditor’s rights attorney. Contact us at Resnick Law, P.C., in Bloomfield Hills and Detroit, Michigan to schedule a consultation.
(image courtesy of Fabian Blank)