The small claims court system allows people to resolve legal problems efficiently and cost-effectively. If you've lost a small claims case, you'll pay the amount you owe directly to the winning side. The order sent to you after the trial will list the amount you owe.
In this article, you'll learn about alternative ways to pay a judgment, what could happen if you can't, and how you might benefit from filing for bankruptcy.
Small Claims Money Judgments
The small claims process starts when the plaintiff files a claim asking the court to award money or "damages" for harm caused by the defendant. The defendant might also file a crossclaim alleging the plaintiff owes the defendant damages.
The court will hear the matter and decide the outcome. The winning side, or "judgment creditor," will receive a money judgment that the losing party, or "judgment debtor," must pay.
Paying a Small Claims Money Judgment
You'll be expected to pay the entire amount in one lump sum. However, that isn't always possible. Here are some other options.
Paying in Payments
Some courts will set up a payment plan if both parties agree to it at the trial, and others allow the judgment debtor to pay the court. While unusual, consider using it when available because the court would have proof that you paid the creditor.
Negotiating Payments or a Reduced Amount
You can try negotiating a payment schedule directly with the judgment creditor, possibly for a lesser amount. For instance, the judgment creditor might take less if you offer to pay immediately. Some judgment creditors will take less now if they can avoid time-consuming, sometimes costly, collection techniques.
Documenting Payment
Retain a receipt once you give the creditor the total or agreed-upon amount. Although the judgment creditor must inform the court that you paid the debt, some might not understand the process, and you might need to prove you paid later.
The court will have a form the creditor will complete and file with the court. Consider requiring the judgment creditor to complete the form when you pay the judgment and file the form with the court yourself.
If You Don't Pay a Small Claims Judgment
Judgment creditors can find property and make you pay what you owe. Here's how.
How Judgment Creditors Find Assets
A judgment creditor can force you to disclose your assets and earnings in one of two ways, depending on your court. You might be required to complete a form listing your property or appear in court to answer questions about your finances.
Expect to disclose information about your bank and investment accounts, real estate holdings, vehicles, boats, and other property. You'll also reveal employment and business interests. If you fail to respond or attend the examination, the court will likely issue an arrest warrant.
Collection Tools Available to Seize Assets
A judgment creditor who knows where to find your assets can recover them using the following tools:
- Wage garnishment. Your employer will deduct money from your monthly paycheck until the debt is paid.
- Bank levy. The bank will withdraw the funds in your account up to the amount necessary to pay off the judgment.
- Seizure. The judgment creditor can take property, such as real estate and personal possessions, to sell at auction. Because of the time and expense involved, it's unusual for a creditor to use this procedure unless you own valuable property free and clear or have enough equity to pay the money judgment, sales costs, and loans you took out to finance the property purchase.
- Till tap. The judgment creditor can instruct law enforcement to enter your business and empty your cash register.
- Keeper. This process is similar to a till tap, but the officer will take customer funds longer, such as an entire day.
Learn more about what to expect in debt collection.
Property You Can Protect From Creditors
A judgment creditor isn't entitled to take everything that you own. Most states allow residents to keep the things needed to work and live, such as clothing, furnishings, and a modest car. Luxury items like rental property, recreational vehicles, and expensive cars are most at risk. Creditors can also often take money in bank accounts and other investments.
You'll find the particulars of the property you can protect in your state's exemption statutes. What states allow residents to keep varies significantly, with some states being more generous than others. Take, for instance, Texas. The liberal exemption statutes protect everyone other than the very wealthy.
Judgment Proof: When You Don't Have to Pay
If you don't have assets a judgment creditor can take, you’re considered "judgment proof." A creditor won't be able to take action against you if you fall into this category and your situation doesn’t change.
Filing for Bankruptcy
However, if you’re judgment proof now but will likely have assets in the future, consider filing for bankruptcy. You’ll stop the judgment creditor's collection efforts and wipe out the debt if you meet the following requirements:
- you qualify for a Chapter 7 case
- your state's exemption statutes protect all of your property, and
- your judgment is the type that you can discharge in bankruptcy.
For more information about judgments that go away in bankruptcy and those that don't, read Personal Bankruptcy and Court Judgments.
Why You'd Want to Take Action
Judgments don't go away quickly. Your state will likely give the judgment creditor a significant amount of time to collect the debt. For instance, California law allows ten years.
Also, interest will accumulate at 3% to 12% per year, depending on where you live, and the creditor can also extend the time to collect by renewing the judgment. So, the longer you wait to pay, the more you'll owe. For instance, suppose a creditor continues to renew a judgment earning 10% interest. After 20 years, a debt of under $10,000 could grow to over $100,000.
In most states, a creditor who fails to renew before the judgment expires will lose the right to enforce the judgment. Check your state statutes.
Finding Your Local Court Rules
While the abovementioned process is relatively universal, many courts adopt additional procedures unique to that state or particular court. For instance, in some jurisdictions, the judgment creditor cannot start collection efforts until 30 days pass. Others have a ten-day waiting period. Another only recommends waiting until the applicable appeal period expires.
You'll find your court rules on your court's website. To locate the information, look under "Collecting the Judgment" or some variation.