Understanding what can occur during a collection action can be vital in determining which accounts to pursue. One common occurrence is that a debtor files for bankruptcy.

There are two (2) types of consumer bankruptcy filings that may likely be encountered during a collection action. The first is a Chapter 7 Liquidation, meaning that the debtor is liquidating his/her assets. The second is a Chapter 13 Reorganization, in which the debtor proposes to pay creditors some of what creditors are owed over time (3-5 years.); the debtor will file a Chapter 13 Plan that sets forth how the debtor plans to do it.

The purpose of filing a bankruptcy is for the debtor to receive a discharge from personal liability for pre-petition debt (debt incurred prior to the date of the bankruptcy filing). The bankruptcy filing provides a stay of any collection actions against property of the debtor’s estate, including wage execution and bank levies.

Continue Reading Bankruptcy Considerations in Collection Actions

The New Jersey Uniform Commercial Code (the “UCC”) was amended, effective May 11, 2015, imposing new requirements on the filing of a financing statement to perfect a security interest in collateral within the scope of Article 9 of the UCC. The amendment provides that in order to be sufficient, a financing statement must state that the collateral listed in the financing statement falls within the scope of Article 9 of the UCC, pursuant to N.J.S.A. 12A:9-102 and 12A: 9-109. Furthermore, the name of the secured party listed on the financing statement must be the legal name of the secured party or the legal name of its representative.

While the purpose of the amendment is to prevent fraudulent filings, a failure to comply, even if there is no fraudulent intent, could result in an ineffective filing, a restraint of collection or enforcement, an alternative disposition of the collateral and in some instances statutory damages, attorneys fees and/or an injunction from filing any future liens, encumbrances or claims against the debtor (or any other persons specified by the court) without court approval. In addition, for some creditors, the filing office can refuse to file a financing statement that does not comply with the new requirements. The amendment is applicable to all financing statements filed on or after May 11, 2015.

If you have filed a financing statement since May 11th or intend to file a financing statement, you should consult an attorney to ensure your filing complies with the strict requirements set forth in the newly enacted amendment. If any financing statement filed on or after May 11th is not in compliance, an amendment should be filed immediately.

When considering collecting a judgment obtained in another state against a New Jersey state resident or a corporation doing business in New Jersey, it is relatively easy to obtain a docketed New Jersey judgment by virtue of N.J.S.A. 2A:49A-25, et. (the “Act”). The process only takes three to four weeks, but it does involve notice to the defendant. On the rare occasion that the defendant objects, the process becomes only slightly more complicated.

Once a judgment has been docketed in New Jersey, pursuant to the Act, the collection process begins in earnest. A law firm that is armed with collection resources, years of experience, and a thorough understanding of the collection practices will have a number of available remedies, including the following:

  1. The levy. Once a judgment has been properly docketed, if the defendant entity or individual has any personal items of any value (including bank accounts), the Sheriff can levy upon these. Once the levy has been perfected, the items are either sold at auction or, if the levy is upon funds, the creditor may file a motion for turnover with the court. A hearing is then conducted resulting in the payment of those funds to the creditor.
  2. Wage execution. If the judgment was against an individual, the most certain and effective way of collecting the debt is usually by way of wage execution. If a defendant fails to object after notice is served an order is entered. The order is then served upon the employer. The employer then must remit 10% of gross wages each and every payday to the Sheriff, provided the wages are above a certain minimal level.
  3. Receivership. If the entity is not paying other creditors it owes, it may be possible to have a court ordered receiver appointed. It would be his/her duty to liquidate the assets of the corporation and make payments to all creditors.
  4. Charging order. If the defendant individual or entity is a member of a New Jersey Limited Liability Corporation (LLC), a motion can be filed in Superior Court against the LLC seeking an accounting of any amounts paid or payable to the defendant, and also seeking supporting orders restraining those payments and/or directing them to the creditor.
  5. Information subpoena. Once a judgment has been docketed in New Jersey the creditor may serve an information subpoena. There is one for an individual and one for business entities. After the information subpoenas have been served the defendant has 10 days to respond. If they fail to fully complete the subpoena, the creditor may make an application to have the individual or the principal of the entity held in contempt, sanctioned and/or arrested. The information contained in these information subpoenas is very helpful for purposes of the other collection strategies noted above.
  6. Post judgment deposition. Once the judgment has been docketed in New Jersey the creditor can seek a post judgment deposition of the debtor, the debtor’s related entities and other third parties, including accountants, suppliers, and customers.

While the above list is not all-inclusive, it suggests post judgment procedures available once an out-of-state judgment is docketed in the state of New Jersey. It can be highly frustrating for a creditor to chase down a defendant into another jurisdiction; however, in the hands of proper collection counsel, New Jersey has an adequate arsenal of remedies to collect an out-of-state judgment’s balance.

I am often asked by clients whether prejudgment interest can be obtained from debtors on unpaid claims. Prejudgment interest is usually awarded by the courts in New Jersey only when a written contract exists between the creditor and the debtor which includes a provision for the assessment of interest if payment is not received by the creditor in a timely manner. The written contract can be a simple as a purchase order or an invoice. However, some counties will not award prejudgment interest unless the contract is actually signed by the debtor.
Prejudgment interest may run on contract claims not as a matter of right but rather in accordance with equitable principles. Absent, however, unusual circumstances the prejudgment rate should be the same as that provided for by the rule governing post-judgment interest. The current post-judgment rate of interest for 2008 is 5.5%. This rate is adjusted on a yearly basis. Equitable principles do not apply to the same extent where the parties have obligated themselves to a certain interest rate by contract. See Pressler, Current N.J. Court Rules, Comment R. 4:42-11, (Gain).
Creditors should seek to protect themselves from debtors who fail to pay their obligations in a timely manner, and additionally should commit their agreements to writing with an appropriate interest provision whenever possible. Creditors should insist that their clients execute such agreements so that misunderstandings are avoided and creditors are protected in the event invoices are not paid in accordance with the agreement between the parties.   

The number of creditors who simply avoid dealing with past-due obligations is amazing. Sometimes, it is simple inertia -it takes a lot of effort and time to constantly chase after overdue balances. In other cases, the creditor is simply uncomfortable dealing with the unpleasant task of collecting monies due. More often than needs to be the case, a creditor’s only hope is exactly that: hope that a debtor will simply pay up, in full, given enough time. As a matter of experience, exactly the opposite is the case: the more time that goes by before a creditor takes action, the less likely it is that the creditor will ever be able to collect all or even part of what’s owed.

Creditors should keep two things in mind with respect to collection of past-due obligations:

1.Creditors can, and should, take specific preventative steps in any debtor/creditor relationship, to protect themselves from future collection problems; and

2.Creditors need not resign themselves to carrying or writing off past-due obligations since numerous legal means exist for collecting what is rightfully due.

Preventative Measures

I advise creditors to establish procedures and policies to maximize both their chances of collecting monies on time, and the likelihood of receiving payment if collection problems do arise. The key tools for this are a thorough credit application; and firm, clear payment guidelines.

Credit Application

Basic information:
It is both reasonable and fair for a creditor to ask its clients to complete a credit application prior to extending credit. The credit application should seek banking information, references, all addresses of the client, as well as the EIN (Employment Identification Number) of the company; if the client is an individual, the Social Security number of the client should be obtained, along with the client’s banking information and place of employment. Fellow business people usually understand and appreciate thoroughness in business practices, so requesting a credit application, even from clients you have previously done business with, need not be seen as unreasonable. A properly completed credit application should assist the creditor with gaining a good understanding of the client’s assets prior to extending credit. If not, the creditor may want to invest some time and funds to confirm that the client has the means to pay the creditor’s invoices, or judgment, if one is ultimately obtained. A creditor simply can’t get “blood from a stone”. Options available to the creditor include hiring an investigator to perform an asset search at various levels of sophistication and cost, verifying the client’s address(es), performing a Secretary of State search, driving by or visiting the client’s residence or office, calling the tax assessor/collector’s office of the municipality in which the client’s residence or office is located, reviewing the client’s records, e.g. recent correspondence, cashed checks, and surfing the Web.

Provisions of Credit Application:
A credit application should specify in clear language that should the client not pay the creditor in a timely manner, and as a result the creditor is forced to employ an attorney, the client will be responsible for such costs. Not only does such a provision shift the expense of collection to the client, but such a provision can also provide a great deal of leverage in settlement negotiations. Additionally, the credit application should contain language stating that overdue balances will incur interest at the maximum rate permitted by law. Moreover, whenever possible, the creditor should seek the personal guaranty of at least one corporate officer, where the client is a corporation. I find that collection efforts are generally more successful when the creditor cannot only legitimately seek what is owed by the client, but also by one or more of the client’s officers; if the company ceases to operate or files for bankruptcy protection, there is another source from which to seek payment. The creditor should verify the information provided by the client on a periodic basis. Information can be easily gleaned from the debtor’s letterhead, envelopes and checks.

Payment Guidelines

The creditor’s payment guidelines should be firm and clear, and printed on the creditor’s shipping documents, contracts and invoices. Typically, payment is due within 30 days from the date goods are provided or services are rendered by the creditor. If payment is not received within that time, the creditor should immediately write to the client reminding them of the provisions of the credit application, and advising that the client’s account will be placed with an attorney if payment is not immediately forthcoming. A follow-up telephone call should also be made by the creditor, so that the client is aware that the correspondence is not merely a form letter. If arrangements acceptable to the creditor cannot be made, the account should be immediately placed with an attorney familiar with the collection process. The attorney who specializes in creditors’ rights and collections will have a large data base and may very well have had prior experience with the creditor’s client. Additionally, given the choice between placing a matter with an attorney or a collection agency, the creditor will find that its fees and costs will typically be lower and the recovery made more quickly by placing the account directly with a collections attorney.

Timing is critical; the likelihood of successful collection efforts deceases as delays in affirmative efforts increase. Companies cease operations, individuals move, and information that the creditor has obtained from the credit application becomes stale.

The creditor should always be mindful of the following red flags: the client complains about the creditor’s use of an attorney’s fee and/or interest provision in the credit application or the creditor’s invoices, the client uses a post office box or mailing service address, the client’s calls are always answered by an answering service, the client is never available when called by the creditor, the name/address on the letterhead and checks used by the client do not match the client’s name and address (take good notes of the mismatches), the client pays by money order or bank check, bounced check or post-dated check, the client is out of state, does no other business in the state, and/or has no assets in the state. In this respect, the creditor may want to incorporate a choice of law provision into its credit application, contract, order confirmation, or invoices to reduce the likelihood of jurisdictional issues in the event of litigation.

Litigating the Collection Case

Pre-Filing Considerations

The Complaint should correctly identify the debtor who is legally responsible to pay the creditor, as well as all potential defendants who may be liable to the creditor. Failure to name a party in the action may very well preclude the assertion of a claim against that party at a later time by virtue of the Entire Controversy Doctrine. See generally Rule 6:30A and comments thereto. Failure to correctly name the debtor, including all trade names utilized by the debtor, may also hamper post-judgment enforcement efforts, requiring the creditor to amend its judgment. The creditor should assert all claims that it may have against the debtor. If the creditor has obtained a personal guaranty, promissory note or other type of agreement entered into by a related third-party, the Complaint should include them as well.

Prejudgment Interest:
The creditor should always seek an award of prejudgment interest in the Complaint, and interest will generally be allowed by the Clerk of the Court in the event of a default by the debtor. The creditor should clearly set forth the basis for the calculation of interest. Prejudgment interest can be awarded either on the basis of the contract between the parties or in the discretion of the Court. If a provision for interest is part of the contract on which the action is based, any rate specified in the agreement will govern, subject to the limitations of the Usury Statute. If no specific interest provision exits in the agreement, the attorney should nevertheless request an award of interest, since such an award is discretionary with the Court. Prejudgment interest will be awarded in accordance with the principals of equity, and will not be awarded at a rate in excess of the legal post-judgment interest rate set forth in Rule 4:42-11, in the absence of a written agreement between the parties.

Attorneys’ Fees:
Attorneys’ fees should always be demanded in the Complaint and may be awarded by the Court if authorized by a contract between the parties, an applicable Statute or by a Court Rule. Assuming the agreement between the parties makes reference to an award of attorneys’ fees, the amount of the award will be subject to the Court’s discretion. If the agreement between the parties calls for a specified percentage of the amount of the claim, Courts will generally permit such an award, providing the percentage is considered reasonable. In those cases, Courts generally will not require an Affidavit of Services Rendered with the information required by Rule 4:42-9. Where the agreement provides for an award of attorneys’ fees, but does not mention the manner in which that amount is to be calculated, the attorney is required to submit an Affidavit of Services Rendered. The amount of the fee allowed will usually be limited to a fee deemed reasonable by the Court based upon the services rendered and the attorney’s experience through the date of the application for judgment.

Choice of Court:
Most matters involving amounts in controversy of less than $15,000 may be brought in either the Law Division or the Special Civil Part, Law Division of the Superior Court of New Jersey. The Special Civil Part has concurrent jurisdiction with the Law Division in all civil actions where the amount in controversy does not exceed the sum of $15,000, exclusive of court costs and statutory attorneys fee. If the amount in controversy exceeds the sum of $15,000, the moving party must bring the action in the Law Division, or waive recovery of the amount awarded over the jurisdictional limit.

If the jurisdictional limit can be met, it is strongly recommended that actions be commenced in the Special Civil Part whenever possible. Some of the benefits of filing in the Special Civil Part include: the filing fees are considerably lower than in the Law Division, the time period for contested cases to reach trial are considerably shorter, and the rules and time periods pertaining to discovery are streamlined. However, I believe that the best reason for bringing an action in the Special Civil Part is because judgment execution procedures tend to be far more effective in the Special Civil Part than in the Law Division. This effectiveness is as a result of the fact that Officers of the Special Civil Part are compensated on a commission basis from the monies which they collect. They receive 10% of the first $5,000 collected and 5% of any amount collected in excess of $5,000. This creates a great incentive, since these commissions are a taxed cost and are paid by the debtor, resulting in Officers of the Special Civil Part being much more aggressive in their handling of the execution process. The Sheriffs’ Officers, who are responsible for execution upon Law Division judgments and typically receive only a nominal fee for mileage when executing upon a debtor’s assets, do not have the same monetary incentives.

In the Special Civil Part, a statutory attorneys fee is provided as a taxed cost of suit. The amount of the fee is 5% of the first $500 sought and 2% on any excess. This fee is awarded to the attorney, over and above any other fee and is typically taken from the last monies received from the debtor.

The creditor should consider reducing its claim to meet the jurisdictional limit of the Special Civil Part in those matters where the amount in controversy exceeds the jurisdictional limit.

Filing Suit and Obtaining Judgment

Once the action is filed and served upon the debtor, the debtor will either default, file a responsive pleading or settle the claim. In the Special Civil Part, a default is entered automatically by the Clerk of the Court when a responsive pleading is not timely filed by the debtor. In the Law Division, the creditor must make a formal request for the entry of default by the Clerk. In both the Special Civil Part and the Law Division, a request for final judgment by default must be accompanied by a certification of proof of amount due and of non-military service. The creditor should attach to the certification an itemized statement evidencing the obligation of the debtor and that the creditor’s damages are liquidated and thus capable of being permitted by the Clerk. The certification should also set forth to the Clerk the date from which interest is calculated. Should the debtor file a responsive pleading to the Complaint, whether in the Special Civil Part, or Law Division, the creditor should immediately serve interrogatories and a notice to produce documents on the debtor, subject to Rule 6:4-3 which limits discovery to those cases where the amount in controversy exceeds the sum of $3,000.00, the limit of the Small Claims Court. Depending upon the defenses raised by the debtor in the responsive pleading, the creditor should soon thereafter file a Motion for Summary Judgment. Too often, the debtor files a responsive pleading to further delay the creditor’s collection efforts. Serving the debtor with limited discovery followed by the filing of a Motion for Summary Judgment forces the debtor to act and often results in the settlement of the action, and payment of the obligation. In some counties, the Clerks of the Special Civil Part are scheduling trial dates within weeks of the filing date of the debtor’s responsive pleading. However, the creditor should have at least 100 days from the date the debtor’s responsive pleading is filed so that the creditor may complete necessary discovery and, if appropriate, file a motion for summary judgment. Rule 6:4-5. The Courts liberally grant adjournment requests if a trial date is scheduled within the 100 day period.

On occasion, the debtor may file a counterclaim against the creditor. A creditor may consider the remedies under Rule 1:4-8 and the Frivolous Action Statute, N.J.S.A. 2A:15-59.1. Early confirmation letters, telephone notes, and unanswered follow-up letters are your best defense to a frivolous counterclaim. The creditor should call the debtor and write early and often regarding non-payment of bills. The creditor should bill the debtor immediately upon delivery of goods or completion of services. When billing, the creditor should ask the debtor to contact the creditor immediately if the debtor has any questions regarding the creditor’s goods or services. The creditor should call the debtor when it doesn’t receive payment in the time frame when it would ordinarily receive payment. The creditor should use sound business judgment in deciding when not to pursue “close call” claims, in which the creditor believes that the debtor may assert a meritorious counterclaim.

Judgment Liens

A judgment for money damages entered in the Law Division serves as a lien against any real estate owned by the debtor in the State of New Jersey from the time the judgment is properly recorded. N.J.S.A. 2A:16-1. As such, that lien can also attach to property to which the debtor acquires title subsequent to the entry of judgment. Venetsky v. West Essex Building Supply Co., 28 N.J. Super. 178(A.D. 1953). The judgment debtor is unable to convey clear title to the real estate without addressing the judgment lien. The lien lasts for 20 years, and may be renewed for an additional 20 years upon motion to the Court.

A judgment entered in the Special Civil Part does not constitute an automatic statewide lien on real estate. A creditor, however, can arrange for a transcript of the Special Civil Part judgment to be docketed in the Law Division. Once docketed, the judgment is a docketed judgment, and will constitute a lien against real estate. See N.J.S.A. 2A:16-36. After the judgment is docketed, all subsequent proceedings in the case will be governed by the Rules applicable to the Law Division.

Federal District Court

The Federal Courts have jurisdiction to hear collection matters in cases where there is diversity of citizenship and the dollar amount of the claim, exclusive of interest and costs, exceeds the sum of $75,000.00. The creditor should consider litigating matters in the Federal District Court only when sued in State court by an out-of-state debtor, and when they believe that they will receive a more favorable disposition of the matter if it is removed to Federal District Court. The cost and time factors must also be considered, as Federal Courts do not as a rule give any preference to collection matters. Another reason to avoid Federal Courts as a plaintiff is the limited post judgment relief available. The U.S. Marshal’s office, which is responsible for execution upon Federal judgments, is generally under-staffed, over-worked, and primarily interested in serving process, apprehending fugitives and not on enforcing post judgment executions.