Collecting Secured and Unsecured Debts as a Creditor

Collecting secured and unsecured debts as a creditor is no easy task, both because of legal hurdles and the difficulty of locating debtors and their assets. When deciding whether to pursue a debtor, the creditor must weigh the risks and expenses of litigation versus the potential payoff of collecting. Close attention must also be given to state and federal laws that protect debtors. We routinely advise clients who are creditors seeking to collect from a debtor as well, to ensure that they are following the proper collections process.

Collecting Secured and Unsecured Debts in Massachusetts

Taking action against debtors usually starts with demand letters, phone calls, and other informal methods. Collectors must be mindful of legal protections designed to prevent unfair, deceptive, and unreasonable collection tactics. Many of the same restrictions exist under both Massachusetts and federal law, while some are unique to state law. Failure to abide by these rules can result in harsh penalties.

Assuming that you’ve attempted to collect, but have been unable to, the creditor may wish to take legal action. This is where the distinction between secured and unsecured debt will make a difference. For secured debts that are backed by collateral, creditors have a number of tools.

For instance, a mortgage is a form of secured debt, with the real property as collateral. If the borrower defaults, the lender can initiate foreclosure proceedings. Ultimately, the house can be reclaimed and sold to compensate the lender for its losses.

A similar process occurs with respect to auto loans, which are backed by the value of the vehicle. The difference is that tracking down a vehicle adds considerable difficulty to the process of reclaiming and selling it. You may need assistance locating the owner of the vehicle. Under state law, creditors can contact persons other than the debtor to attempt to ascertain the debtor’s location. But the creditor must reasonably believe that it no longer has accurate information on the debtor’s whereabouts.

Conversely, unsecured debts lack the protection of collateral and must be pursued via litigation. If the creditor believes the debtor has assets that can be reached, a collection lawsuit can be filed. Obtaining a favorable court judgment is often a matter of course since debtors routinely fail to show up in court to defend themselves. Still, having a lawyer draft the complaint and summons, and ensure notice is given and other rules are followed, is important. Mistakes can potentially void any judgment obtained.

Potential Remedies for Collecting Debts

If you obtain a favorable court judgment, the next step is enforcing it. Creditors have several potential remedies to do so:

Attachment. A creditor can ask the court to attach the debtor’s bank account or real estate to satisfy judgment on an unsecured debt. This can be done with or without notice to the debtor. To attach without notice, the creditor must convince the court that the debtor is likely to hide or liquidate assets if notice were to be given. Attachment can also be used against other property such as vehicles and boats.

Wage attachment (garnishment). Attaching the debtor’s wages – sometimes called wage garnishment – is another option. Certain types of income are exempt. There are also limits to the amount that can be garnished and special rules for a debtor in bankruptcy.

Reach and apply. If the debtor expects to receive non-income money from a third party, such as rent payments, there is an option to “reach” this money and “apply” it to what the debtor owes the creditor.

Receiver. The court can appoint a receiver to manage a person’s or corporation’s financial matters with respect to debts. This requires proof that past collection efforts against the debtor have failed. But if successful, an appointed receiver can take control of a debtor’s assets, liquidate them, and uncover others that may have been concealed.

Post-judgment discovery. Winning a court judgment doesn’t necessarily mean the end of discovery methods that can uncover information about the debtor’s assets. A post-judgment deposition can compel the debtor to provide information about bank accounts, real estate, investments, and numerous other assets that can be seized.

Throughout the collection of secured and unsecured bebts, the creditor will be confronted with both practical considerations and legal restrictions on its activities. Having an experienced creditor’s rights attorney can streamline this process and ensure your resources are spent wisely to recoup losses.

Jennifer Conrad, Esq.

Of Counsel