Brownwood Collections Attorney
Our firm has experience working with individuals and businesses in collecting debts of all types. The process of collecting a debt can be complicated and frustrating. Not only must you be familiar with Federal and Texas law regarding collection practices, you should also anticipate debtors that will attempt to hide assets, that have the laws largely in their favor and that will use multiple business entities to hinder and delay the process. In addition to advising the client as to the law, an attorney should also analyze the situation to determine if the cost of collection is justified by the possibility of eventually collecting the debt.
Texas Debt Collection Process
The collection process typically starts with a certified demand letter being sent to the debtor. The demand letter serves a number of purposes, including:
- Putting the debtor on notice that you are serious about collecting the debt and providing them a last chance to pay;
- Provides a method to communicate Fair Debt Collection Practices Act disclosures;
- Provides a method to communicate Texas Debt Collection Practices Act disclosures;
- Acts to trigger a claim for statutory attorney’s fees; and
- Serves as a method to verify addresses for the filing of future lawsuits.
The demand letter is normally sent to all debtors at all known addresses to assure that everyone is placed on notice and that all attempts to settle the matter have been exhausted prior to proceeding to litigation. Facing the possibility of litigation and paying the opposing party’s attorney’s fees, can often times force the debtor to change his position on paying the debt.
If the debtor refuses to pay the debt after receiving the demand letter, the next step is to proceed with the filing of a lawsuit. How a case proceeds through this process and the options available will depend on the creditor’s status. In Texas, creditors can be either secured or unsecured creditors.
Texas secured creditors often have an advantage over unsecured creditors when it comes to collection cases as their debt is secured by specific assets and are based on their priority. Priority is established according to state law, but generally the concept is that the first creditor to file and perfect their interest in the collateral will supersede subsequent filers.
In order to become a secured creditor, the creditor must have a perfected security interest. How to perfect a security interest varies based on the type of collateral. For example, perfecting an interest in a car requires a notation and holding of the certificate of title, whereas perfecting an interest in personal property of a debtor is created generally by a filing with the Secretary of State's office where the debtor is located.
Although Texas secured creditors often have an advantage over unsecured creditors when it comes to collection cases, there are still many options available to unsecured creditors to ensure payment. When a security interest is not available, options to unsecured creditors include:
- Work out agreements;
- Promissory notes;
- Forbearance agreements;
- Personal guaranty agreements;
- Corporate guaranty agreements; and
Unsecured creditors always maintain the option to secure their debt and become a secured creditor. If you have created an unsecured debt and the situation becomes distressed, you should consult an attorney to determine if securing your loan is an option.
Judgments are official decrees signed by a state or federal judge which adjudicate the rights of parties in a lawsuit. They can resolve part of the parties' claims or all claims. Judgments can be entered by the court when the defendant fails to answer a lawsuit after proper service of citation (called a "default judgment") or after the court has considered evidence submitted by the parties.
Once a judgment has been entered, the parties have a limited amount of time to challenge the judgment, such as by filing motions for reconsideration, motions for new trial or an appeal to a higher court.
Once the time to challenge the judgment has expired and the judgment becomes final, the prevailing party can proceed with the process of collecting the judgment. This process can involve garnishment, turnover, execution on real or personal property, as well as, other methods permitted by law.
Pre-Judgment and Post-Judgment Collection Remedies
Garnishment in Texas is usually a post-judgment method for collecting amounts owed to a judgment creditor from a third party, as opposed to the actual debtor. The process involves the judgment creditor filing suit against the third party to require the transfer of property or pay any money of the debtor in the possession of the third party directly to the judgment creditor. Garnishment is rarely used as a collection tool prior to the entry of a final judgment in Texas. However, in limited circumstances, a pre-judgment garnishment can be used to prevent a third party from delivering the debtor's property to another person prior to the entry of the final judgment.
Governmental agencies also commonly use garnishment actions to recover money owed (i.e. past-due child support and unpaid income taxes).
Using the procedure known as sequestration, a creditor can recover property in which it has a security or title/ownership interest prior to final disposition of its claims against a debtor. The creditor must file a sworn application, based upon personal knowledge, establishing the statutory grounds for sequestration and post a bond in an amount which the court finds will adequately compensate the debtor in the event that the creditor fails to prosecute its claims.
A writ of sequestration will only be issued after a hearing before an appropriate court, although that hearing may be held without notice to the debtor in certain circumstances. In addition to the bond amount that must be posted by the creditor, the court's order will include a replevy bond amount that must be paid by the debtor if he wishes to regain possession of the property pending the outcome of the lawsuit.
In Texas, the writ of sequestration will be issued to a sheriff or constable with the writ commanding that officer to take specifically described property into his possession and keep it secure pending further action by the court, unless the debtor posts the replevy bond.
Writ of Attachment
A writ of original attachment in Texas is a post judgment remedy, often referred to as a "prejudgment turnover". It is a remedy to seize property of the debtor held by a debtor prior to judgment when there is not a security agreement covering the specific personal property. It is available to a plaintiff in Texas in a suit if:
- 1. the Defendant is justly indebted to the Plaintiff;
- 2. the attachment is not sought for the purpose of injuring or harassing the Defendant;
- 3. the Plaintiff will probably lose his debt unless the writ of attachment is issued; and
- 4. there are specific statutory grounds for the issuance of the writ.
An attachment, therefore, is not available in all situations and requires specific statutory grounds. Section 61.002 of the Texas Civil Practice and Remedies Code contains the necessary specific grounds which include:
- 1. the Defendant is not a resident of the State of Texas or is a foreign corporation or is acting as such;
- 2. the defendant is about to move from Texas permanently and has refused to pay or secure the debt;
- 3. the defendant is in hiding so that ordinary process of law cannot be served on him;
- 4. the defendant has hidden or is about to hide his property for the purpose of defrauding his creditors;
- 5. the defendant is about to remove his property from Texas without leaving an amount sufficient to pay his debts;
- 6. the defendant is about to remove all or part of his property from the county in which the suit is brought with the intent to defraud his creditors;
- 7. the defendant has disposed of or is about to dispose of all or part of his property with the intent to defraud his creditors;
- 8. the defendant is about to convert all or part of his property into money for the purpose of placing it beyond the reach of his creditors; or
- 9. the defendant owes the plaintiff for property obtained by the defendant under false pretenses.
Attachment remedies are rarely used since they require a bond and may provide for liability to the Creditor if there is a wrongful attachment.
Creditors in Texas have a procedure to collect valid judgments with court assistance in what is known as a "Turnover Order". The Texas Turnover statute is found in Texas Civil Practice and Remedies Code Section 31.002, which states that "[a] judgment creditor is entitled to aid from a court of appropriate jurisdiction through injunction or other means in order to reach property to obtain satisfaction on the judgment if the judgment debtor owns property, including present or future rights to property, that:
- 1. cannot readily be attached or levied on by ordinary legal process; and
- 2. is not exempt from attachment, execution, or seizure for the satisfaction of liabilities."
If Turnover is appropriate, the court may:
- 1. order the judgment debtor to turn over nonexempt property that is in the debtor's possession or is subject to the debtor's control, together with all documents or records related to the property, to a designated sheriff or constable for execution;
- 2. otherwise apply the property to the satisfaction of the judgment; or
- 3. appoint a receiver with the authority to take possession of the nonexempt property, sell it, and pay the proceeds to the judgment creditor to the extent required to satisfy the judgment.
Turnover relief is a very powerful tool available to Texas creditors, but it is limited to non-exempt assets and does require certain findings by the court. Turnover orders have the presumption, however, that assets are non-exempt and it is the debtors' responsibility to show that the assets to be turned over are exempt.
Writ of Execution
A writ of execution is the most common post-judgment remedy and is a judicial writ directing the enforcement of a judgment. The writ has a life of 30, 60 or 90 days depending on what is requested. Pursuant to the terms of the judgment and the writ, the sheriff or constable will levy on the debtor’s nonexempt property, sell it and deliver the proceeds to the creditor to apply toward the satisfaction of the judgment.
A writ of execution is typically issued after the expiration of 30 days from the time the judgment is signed or after the order overruling a motion for new trial is signed, provided no supersedeas bond has been posted and approved. Upon the issuance of the writ, Texas law requires the sheriff or constable to “proceed without delay” in carrying out terms of the writ.
Many Texas creditors believe that once a debtor files for bankruptcy protection, there is no chance of collecting any of the debt. While certainly a bankruptcy filing can make collection of a debt more challenging, and many bankruptcies do end in full discharge of debtors without any payments to creditors, there are certain situations where a creditor can benefit from the bankruptcy court overseeing the payment of creditors.
A reorganization of a debtor’s finances and operations through bankruptcy may make it possible for a debtor's business to survive and keep the possibility of collecting the debt alive. Also, if the creditor is secured, or a landlord, there are additional remedies in bankruptcy that may be available to provide hope of recovery.
Generally, a debtor files under a particular chapter of the bankruptcy code, such as Chapter 7 (individual liquidation), Chapter 11 (business reorganization), or Chapter 13 (individual reorganization). Each type of bankruptcy has its own rules and corresponding effect on the creditor, so it is important that the creditor discuss these options with an attorney to protect his/her right to ultimately collect the debt.