When a debtor is unwilling or unable to pay money to creditor’s, creditors are faced with a difficult decision to make. A creditor can attempt to negotiate with debtors, but this is only useful if debtors are able and willing to pay at least a portion of debt owed. A creditor can file a lawsuit, but the legal fees can be costly and if a customer declares bankruptcy, creditors may be unable to recover some or all of the outstanding debt. Creditor’s can also sell the unpaid debt to third party collection agencies, but often collection agencies will only pay a very small portion of the total amount owed.
None of these options provide the creditor with a favorable outcome, but there are several other possible courses of action available in certain cases that may provide a better outcome for the creditor. These actions include replevin, garnishment, liens, and involuntary bankruptcy proceedings.
Replevin is a pre-judgment action that allows a creditor to seize secured debt. The fact that it is a pre-judgment action means that the property can be seized before the case reaches final adjudication (a final decision).
If a debtor borrows money to purchase a tangible asset (like a car) that can be repossessed, that asset can be seized in a replevin action. In some cases replevin actions are only used when the creditor is unable to find and repossess (take back) the asset themselves, while other states require replevin instead of repossessions.
Creditors bring a replevin action in court to force the borrower to turn over the asset. In some jurisdictions, the creditor is required to post a bond (a sum of money) pending final adjudication in order to protect debtors from wrongful seizure of their property.
Another alternative for creditors is to file a replevy action instead of an action for replevin. In a replevy action, immediate seizure of the property is not sought. Instead, the debtor is asked to post security so if he loses the case the creditor is able to recover the property.
Garnishment or attachment is another potential remedy available to creditors in some jurisdictions. Garnishment permits creditors to either take the debtors’ property or to take title to the debtors property. Attachment can involve requiring a debtor to turn over property to the court, where it will be presented to the creditor to satisfy a debt. It can also involve garnishing a debtor’s wages or taking money directly from their paycheck. In order to garnish a debtor’s wages, the creditor must have obtained a judgment against the debtor, and the garnished amount must not exceed 25% of the debtor’s disposable income.
A lien provides creditors a partial interest in a debtor’s property. This partial interest or security interest prevents a debtor from selling property, and allows the lien holder to keep the property in some cases until the debt is paid. Mechanics liens and materialman’s liens are the two most well known liens, which belong respectively co mechanics and construction workers/contractors. A mechanics lien allows a mechanic to keep a vehicle until debts are paid. A materialman's lean allows creditors’ to maintain a partial interest in real property (real estate) and in some cases even force the sale of the property to collect on a debt.
Creditors can get together and force a debtor to declare bankruptcy. This procedure, called involuntary bankruptcy, an result in the court creating a mandated payment plan in which the debtor must sell assets in order to pay creditors.
Creditors who are trying to collect debts from debtors should consult with an attorney to determine their best course of action. Each of the different methods of debt recovery has different potential consequences and requires different legal steps.
Debtors who are faced with legal action for unpaid debts should also consult with an attorney as soon as possible to explore their options for debt settlement and to protect both their assets and credit scores.