Most are predicting a tough economic climate for 2024 (the “risk”). I have no reason to disagree with them. However, that climate can be organized for huge gains to you (the “reward”). This will be (presumably) the fourth recession I’ve been through as a practitioner. The recipe to come out ahead is rather simple and well tested.
There are two kinds of pain: the pain of discipline, and the pain of regret. Which do you want to experience? Stick to your principles but evaluate everything. Consider carefully how much you care about factors such as LTV. Remember 90% of your losses will come from circumstances where you deviated from your guidelines. You’ve established them for a reason. Stay with them!
Be a Robber Baron
This is a great time to fill up the warehouse. Sue your defaulted customers. Hold their heads underwater until they stop squirming! The stories they tell you aren’t true, and the money isn’t going to show up next month. They are just living rent free with your money. Don’t walk away from them with the defeatist notion they don’t have anything. The point is … they don’t have anything Now. They don’t have any money to fight against you either, so it is cheaper to get the judgment. They won’t wiggle much. But Steve, it is too costly! Every nickel you spend perfecting judgments right now will come back dressed like a dime in a short while. There will never be a more cost-effective moment in time for you to rid your portfolio of bad debt. Sue them now, reduce the defaulted loans to judgments, get your hands on what collateral and assets exist, let the remainder gain interest at the State rate (10%), and collect them when the economy turns around. The circumstances will never be healthier for you to perfect judgments in these cases. Waiting works against you (statute of limitation runs, you lose your evidence, customers accumulate money to fight you with, they’ll transfer their valuable assets). Every sensible indicator points you toward suing now. If you wait, you are allowing your customers to stockpile defenses, and a war chest to fight against you with.
Simple (and Cheap) Methods to Perfect and Secure Your Judgement
Demand letter: This one is pretty self-explanatory. It is a letter demanding payment of the judgment. It is worth the price of a stamp to send a letter and a copy of the judgment to the borrower. Ask him to pay it. This seldom works out. The few occasions it does, makes it worthwhile in every circumstance.
Notice of Entry: Your borrower has a few weeks to appeal or set aside the judgment you’ve won. The time to do that doesn’t begin until after you give formal written notice (in the mail) of the judgment. Do this immediately. Stamps are cheap – send these to every address you have for the borrower.
Abstract of Judgment: These are simple two-page forms. Other than your judgment, you’ll want the social security number or driving license number of your borrower. Record these in every county where you think the borrower has (or might have in the future) an interest in real estate. The abstract stays of record for ten years (then can be extended another 5). These will cost less than $100 to create, and about $50 to record. For ten years, if ever your borrower wants to buy, sell, or refinance real estate in the county where the abstract is recorded, he MUST pay you before his transaction can close. You need not do anything other than wait for a call from escrow. They will ask for a demand, which you will send, and you’ll be paid. This is the best kind of fishing there is. You’ve built a great deal of leverage. The lien automatically encumbers all real estate in the county where recorded, the very moment it is recorded. California has 58 counties. Pick whichever you like (or all of them, there is no limit).
Bank levy: The court will issue a writ of execution, which you’ll send to the sheriff with an instruction letter. The process is rather intricate but shouldn’t cost more than $1,000. The sheriff then serves the writ to the bank which then searches for account (and even safe deposit boxes) where your borrower has an interest. If there is any money in it, you get it all! The sheriff will collect it, hold it for a few weeks (while the borrower gets to file with the court “claims of exemption” – reasons he should get to keep some of the money), then you get it all. Don’t expect this to work more than once. Even dimwitted judgment debtors will close their accounts and move to another bank. However, nothing prevents you from getting multiple writs all at once. We recommend getting five and serving each of the five largest banks in CA at the same time. We estimate that will hit 80% of banking customers in the state. Individual accounts, joint accounts, trust accounts … doesn’t matter. If your judgment debtor’s name is one of those on the account, you get it all. If he has a Rolex in the safe deposit box, you get it.
Wage garnishment: For this one, you’ll need to know where the borrower works. Prime targets are government worker. Much like the bank levy, you’ll get a writ of execution which the sheriff will take to the borrower’s employer. Henceforth, you’ll get 20% of the borrower’s take home pay until the judgment is paid in full (including interest and collection costs). You can expect a check from the sheriff every month until the debt is paid, or the borrower quits his job in protest.
The fees and costs you incur are all added to the balance owed. Ultimately, your borrower is paying your collection costs.
Turn Your Bad Debts Into Cash:
Values will increase, rates will come down. Then you can collect on your (interest bearing) judgments. Imagine how upset your borrower’s next wife will be in three years when she finds out they can’t buy another house for their growing family because he has to pay your judgment first. Right now is your chance to look like a genius in a few years.
For questions or concerns with defaulted loans, please contact Geraci LLP. We are here to help protect your interests.