The REO is sold, and a balance remains.  You find yourself a “sold out junior”, or the REO didn’t gather the full balance owed on your loan, so the collateral is exhausted, but amounts remain unpaid.  This is your “deficiency balance”.  You’ve negotiated with the borrower for a payment plan or a lump sum.  You’ve sent a “demand letter”, and the money has not come through.

Litigation 

Electing to pursue the borrower for a deficiency judgment, a complaint in the Superior Court for breach of contract (and common counts) is in order.  This requires most of the same accomplishments of any lawsuit; viz filing the complaint with the Court, serving the customer, and obtaining a judgment. 

Why bother?  Each of these events presents an opportunity (trigger) for your borrower to contact you and arrange payments.  He may get informal notice of the lawsuit, and then know you are serious.  When the process server comes to his home or office and hands him a summons, he will know it is serious.  When a judgment is entered, you have plenty more leverage to wield. 

Is it Worthwhile?

What is the point of all this?  There are several good answers.  You lose the right to enforce your written contract four years after default (the statute of limitations).  Given you can’t wait forever, it might as well be undertaken now so you can get to your collection remedies (more on this later).  Also, they are not paying you voluntarily, so the trigger events (above) might get their attention (and more importantly, get your money). Finally, the documents, evidence, and recollection you have about this case is fresher/better now.  It won’t age well.  Your testimony won’t be superior in three years to what it is now.  Also, your customer may disappear with his resources between now and then.  Much better to tag him now while you can find him and he still has some money.

Defaults

If your customer doesn’t respond to the lawsuit, it will go quickly (90-120 days) and not cost very much.  You can then embark on collection.

Contested Cases 

If they do respond, it might be considered good news.  They are likely protecting something and have the resources to defend.  You should still win; it will just take a bit longer.  So long as your contract was properly formed and executed, you have an accurate account payment history, and there were no significant mistakes in the collection and foreclosure process, you should be entitled to a judgment for the full amount owed (deficiency balance), plus attorney’s fees, costs and interest (so long as the default provision of your contract provides for them).

The lawsuit for your deficiency has the informal effects (above) which may bring your customer (and his checkbook) to you.  If not, now that you have a judgment, you are clothed in great power to get your money without his consent.  You’ll notify him of the judgment (Notice of Entry), record abstracts (which automatically affix to all his real estate – even future acquired real estate – for ten years, thus making you a secured creditor again), levy his bank accounts, garnish his wages, take his deposition and force him to identify his assets for you.

Collection Remedies

• Abstract of Judgment:  These are simple two-page forms.  Other than your judgment, you’ll want the social security number or your borrower’s driver’s license number.  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.  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 will 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.  The borrower will have long forgotten about you, but the County Recorder and Title companies will have not.  (How mad is his wife going to be when they now can’t sell their house, or buy their dream home?)  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.  You need do nothing else.  California has 58 counties.  Pick whichever you like (or all of them, there is no limit).

• Bank levy:  These used to be difficult.  To collect, you’d need to know the actual branch of which bank your borrower used.  Now, banking is (mostly) centralized and there aren’t nearly so many banks used.  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 workers (DMV, teacher, CalTrans, police department).  Folks make careers there and tend not to leave with the frequency employees do in the private sector.  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.

• Judgment debtor exam (JDE):  For the above options, you don’t need to know where your borrower is.  It doesn’t matter.  For this one, it does.  You need to have a process server actually touch him with the papers.  Subservice isn’t any good.  You need to actually serve the borrower.  A JDE is very similar to a deposition (which is taken during the litigation).  The difference is a JDE comes with a Court Order to appear.  If your borrower doesn’t appear for the JDE, the Court will issue a Bench Warrant.  Mind you, law enforcement doesn’t actively seek these out for enforcement, but some evening when your borrower is driving home from a nice dinner out and runs a stop sign – he is going to jail.  The warrant will appear for law enforcement just the same as if he skipped bail on his murder charges.  The JDE is typically taken at the courthouse.  A reporter is not required but is recommended.  This option is more costly (you are paying for your attorney’s time, as well as the court reporter for a transcript).  Your borrower is administered and oath and is required to identify assets which you can use to satisfy your judgment.  Ask where he works, and banks (garnish and levy).  Find out where he owns real estate (abstracts).  Brokerage accounts?  That is a nice-looking ring, what is it worth?  How old are your parents?  Are you in their will?

Each of these remedies may lead to funds for you to use in satisfying your judgment.  Even if they don’t, you are putting pressure on your borrower.  At some point, hopefully it will be easier for your borrower to pay you than it is for your borrower to play cat and mouse with you. Then you’ve won.

Always remember, the fees and costs you incur are all added to the balance owed.  Ultimately, your borrower is paying your collection costs.

Having trouble with a borrower? Geraci Law Firm can help with legal remedies to recover your funds. Contact us today.