Some think there are only two types of creditors – secured and unsecured creditors. However, it can be argued that there are three types of creditors – secured, unsecured, and judgment creditors. Each type provides different options for collecting a debt. A secured creditor is protected by having an interest in collateral. An unsecured creditor is fairly powerless until it becomes a judgment creditor.
After a creditor fails in trying to collect a debt through conventional collection methods, it will likely file a lawsuit. Once it is awarded a judgment by the court, it now has several options it may pursue to satisfy the debt. It may garnish wages or a financial account. It may also convert the judgment to a lien and place it on real property such as a house or personal property such as an automobile.
Once a judgment is entered on behalf of an unsecured creditor attempting to collect a credit card debt, an unsecured creditor is converted into a judgment creditor, which now has more options than an unsecured creditor to collect a debt. This places any consumer at a disadvantage since he or she is more at risk of losing valuable monetary assets.
Once a creditor obtains a judgment or default judgment, it has better options other than using the telephone and mail to convince a consumer to pay a debt. Among these options are wage garnishments and bank account levies. Even more valuable is the ability to place a lien on both real and personal property. In this situation, only those defendants who have nothing but exempt property and exempt income, such as Social Security benefits, disability benefits, child support, public assistance, or workers’ compensation, would be collection proof and therefore safe from losing assets.
A creditor with a judgment may obtain a lien known as a judgment lien, which is a property right that secures a creditor’s right to payment. Liens must be perfected, which is the legal process required to make a security interest effective against third parties or to retain its effect in the event of default.
Most importantly, a lien converts unsecured debt into secured debt, which places a creditor in a better position as a debt collector. Once subject to a lien, a consumer faces more collection efforts than incessant communication by phone calls and letters. They are likely to continue, but now with an added punch once a judgment lien is obtained.
A garnishment allows assets such as money to be seized, but a lien allows personal property to be sold. Wage garnishments and bank account levies are limited in the amount of funds that may be seized over thirty days. However, while a judgment lien takes more time to obtain and execute, it allows the judgment lienholder to sell personal property such as an automobile, which may satisfy the debt in full instead of partially through monthly garnishments.
A lien may be placed on a car since it is classified as personal property. The car’s value and any equity in the car must immediately be determined and compared with the exemption for automobiles allowed by Utah law. This exemption is $3,000 for a motor vehicle not designed for or used primarily for recreational purposes. Married couples are both entitled to the exemption and, thus, they may double the exemption amount, making it $6,000. If a motor vehicle is used as a tool of a consumer’s trade, the exemption is $5,000. The amount of the exemption measures the equity in the vehicle rather than the vehicle’s value.
It is not uncommon for consumers to own cars that are not yet paid in full and still subject to a lien and security interest. These car owners may never possess any equity in a vehicle during the period of ownership. Creditors are much less likely to sell a vehicle where it will only pay off the car loan.
A judgment lien may e a problem where a consumer owns the car free and clear or has equity above the exemption amount of $3,000. Once a judgment creditor perfects a lien on an automobile, it will no longer be a simple unsecured creditor but a creditor with a debt secured by a motor vehicle just like a secured creditor.
Now may be the time to consider filing a bankruptcy case. If the lien is not yet perfected, a Chapter 7 bankruptcy case will discharge the debt. However, if the lien has been perfected, because the debt is now like secured debt, it must be treated like any other secured debt in a bankruptcy case.
If the car is seized and sold but the proceeds of the sale are insufficient to pay the debt in full, a creditor may sue for the difference and obtain a judgment for the deficiency. Any obligation to pay this deficiency balance may be discharged in a Chapter 7 bankruptcy case.
One of the Morrison Law Group’s qualified and knowledgeable bankruptcy attorneys can answer any bankruptcy debtor’s questions about filing a Chapter 13 bankruptcy case. Call 801.456.9933 today to schedule a FREE consultation. We have locations in Ogden, Logan, Sandy, and St. George to serve the residents of the counties of Weber, Cache, Salt Lake, Utah, Morgan, Davis, Washington, and surrounding areas.
