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How Can Creditors Collect on a Secured Debt?

5 Ways to Recover a Loan

There are several ways that a creditor can attempt to collect on a loan that has gone into default.  In most cases, creditors must first sue a debtor in order to win a money judgment against the debt, unless that debt is guaranteed by collateral.

In the case of guaranteed debts, collection can occur in a variety ways including repossession, foreclosure and court action which will allow a creditor to obtain a judgment for payment.  Interestingly, an unsecured debt can convert to a secured debt when a creditor files a legal claim (lien) against a debtor’s property.

In both cases, a creditor can repossess or foreclose on the secured property to collect the debt.  Although a debtor may file for bankruptcy to delay foreclosure, the creditor may petition the bankruptcy court for permission to proceed with a foreclosure if the debtor has defaulted on payment.

Collecting on unsecured debt such as credit card debt requires that the creditor to file and win a money judgment against the debtor before repossessing income and property.  In many cases, however, a debtor may not have enough money to pay off a judgment, so a creditor may be better off collecting on the debt by using a reputable collection agency.

1.     Filing a Property Lien

Once a creditor files a lien on debtor’s property, the creditor may choose to receive payment for the judgment plus accrued interest from the escrow, or foreclose on the judgment lien.  The foreclosure forces the debtor to sell their property and pay off the creditor when there is enough equity in the property to pay all the liens and costs of foreclosure.

2.     Garnishing Wages

If the debtor is employed, a creditor can file an Earnings Withholding Order to garnish wages until the debt is paid.  The creditor may have the right to collect up to 25% of the amount over the federal minimum wage that is earned while the debtor is working.  A wage garnishment does not apply to the self-employed.  A debtor may elect to file a Claim of Exemption within 120 days of receiving the garnishment order.  If this occurs, the creditor has the right to oppose it.

3.     Filing a Bank Account Levy

A creditor can file a levy on a debtor’s bank account as long as the creditor knows the debtor’s bank branch and account number.  The debtor has 10 days before the sheriff will collect and deliver the payment to the creditor.  A debtor may elect to file a Claim of Exemption within 10 days of receiving the levy.  If this occurs, the creditor has the right to oppose it.  The court then may hold a hearing to decide whether to turn all or some of the money over to the creditor.

4.     Filing a Lien on Personal Property

The creditor can have the sheriff take personal property and sell it at public auction to pay a debt.  Going through this process is fairly expensive, so unless the personal property is worth a lot, it is not in the creditor’s interest to follow this procedure.

5.     Renewing the Judgment

Money judgments automatically expire after 10 years, so creditors must be aware to file a request for renewal of the judgment with the court before the 10 years run out.  If the judgment is not renewed, it will not be enforceable and the debtor will be released from payment.  Once a judgment is renewed, the interest that has accrued will be added to the principal amount owed.

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