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The Check’s in the Mail:  Unsecured Creditors’ Legal Options

Some creditors have it better than others. No one knows this more than an unsecured creditor who is dealing with a borrower in default. Unlike a secured creditor, who can repossess the collateral that was pledged in exchange for a loan, an unsecured creditor has limited options. The unsecured creditor  can either attempt to negotiate a settlement with the debtor, or it can go through the courts to obtain a money judgment against the debtor.

Typically, creditors start with the first option. They may even hire a collection agency or attorney to move the process along. If, after a period of time, that doesn’t work, the creditor should evaluate whether going to court is worthwhile: a money judgment is only as good as the ability to collect on it. If the debtor doesn’t have any meaningful assets, the judgment is worth little more than the paper it is printed.

So before going to court, a creditor should conduct an asset search of the debtor. If the debtor is a sole proprietor or a partnership, an individual owner can be held responsible for the debts of the business, in which case a creditor can go after the individual’s personal assets in addition to those of the business. If the debtor is a corporation or LLC, and the members or shareholders did not sign any personal guarantees, then the creditor is limited to collecting against business assets only, except in very limited circumstances.

If the creditor determines there are sufficient assets to pursue the debtor in court, it can then file a claim for a money judgment. These judgments are generally not hard to obtain provided that the creditor can show the debtor actually owes the debt. However, obtaining the judgment is just the first, and easiest step, in the collection process. After obtaining the judgment, the creditor can involve the local sheriff’s office to attempt to seize any real property owned by the debtor. However, all too often, the local sheriff is unable to provide the creditor with any real assistance. The creditor then must return to the courts in order to pursue supplemental proceedings against the debtor to attempt collect on the judgment.

It is important for creditors to be mindful of consumer protection laws when they are evaluating the assets of the debtor in determining the potential to recover a debt. For instance, in South Carolina, consumer protection laws prevent creditors from reaching the first $50,000 of equity the debtor holds in his or her primary residence or the first $5,000 of equity in a car. Moreover, South Carolina courts will not typically allow garnishment of a debtor’s wages to collect on an unsecured debt. In sum, unsecured creditors should always do a careful cost-benefit analysis before taking on a debtor in default.

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