Enforcement of a money judgment

     Generally a creditor with a judgment must enforce a money judgment against property of the debtor through a process known as "execution."   Judgments are enforceable for a specified period of time. For example, in California, a judgment may be enforced for a period of ten years from the time it is entered, subject to timely renewal for successive ten year periods. 

     Execution begins with a writ, issued by a court following judgment. The writ, typically referred to as a writ of execution, orders a levying officer, typically a sheriff, to seize specific property of the debtor and, upon appropriate notice and advertisement of sale, sell the property at auction to the highest bidder. Proceeds from the sale of property seized are applied first to payment of costs incurred by the levying officer and next to any liens on the property.  The balance is paid to the judgment creditor in partial or total satisfaction of the judgment. If the sale does not produce enough proceeds to satisfy the debt, the creditor may repeat the process with respect to other property of the debtor.  In the rare case where the proceeds produce more than enough to satisfy the judgment, the balance is paid to the debtor. 

     The judgment creditor may bid at the execution sale (known as a "credit bid"), at which there may or may not be other bidders. If the credit bid is the high bid, the creditor gains title to the property and the sheriff simply credits the amount of the bid against the judgment (because it would be silly for the judgment creditor to take money out of one of its pockets to pay the levying officer who would then return the money to the creditor's other pocket). The judgment creditor interested in bidding may bid in some or all of its judgment. 

     The levying officer makes no warranties of quality or title with respect to the property and cannot offer prospective purchasers access to real property for purposes of inspection prior to the execution sale.  In addition, third party purchasers must pay cash for the property at the time of sale (or, in some cases, a deposit at the time of sale with the balance due shortly thereafter) and, in the case of real property, will be responsible for evicting tenants.   In many jurisdictions, the debtor may redeem (i.e. buy back) the property from the purchaser for a short period of time following the sale.  For these reasons, execution sales will rarely, if ever, generate bids equal to the fair market value of the property (the amount that a willing seller would pay a willing buyer if the seller were not compelled to sell and the buyer were not compelled to buy). 

     If the judgment creditor is unaware of the nature, location, or value of the debtor's property, the judgment creditor may obtain a court order that the judgment debtor appear in court for an examination about assets, may conduct Lexis or WestLaw asset searches, or may hire experts specializing in the discovery of assets.

     In many cases, a judgment debtor is owed a debt by another. If the judgment debtor is a wage earner, the employer owes her wages. If the judgment debtor has a checking account, the bank owes her the amount of funds credited to the account. If the judgment debtor has a tort judgment against a tortfeasor, the tortfeasor owes the judgment debtor the amount of the tort judgment. If the judgment debtor is a manufacturer, the purchasers of its products owe for goods purchased on credit. A judgment creditor may satisfy its judgment by obtaining a writ of garnishment ordering the relevant third party (e.g. the judgment debtor's employer) to pay the judgment creditor.  Garnishment procedure varies among states.

     If a debtor has an interest in real property, a judgment creditor may obtain a lien on that real property, either before or without pursuing the execution process, by recording suitable evidence of the judgment in the appropriate land record's office.   Such a lien, a form of judicial lien, is typically referred to as a "judgment lien."  If the debtor has an interest in more than one parcel of real property in a county, the lien will attach to all real property in the county in which the debtor has an interest. If the debtor does not have an interest in real property, the recordation will cause a lien to attach to real property if and when the debtor acquires an interest in real property located in the county of recordation.

     In California a judgment creditor can also obtain a judgment lien on certain types of business personal property by filing a Notice of Judgment Lien with the Secretary of State. An analagous remedy is available in a few other states. Like the judgment lien on real property, the judgment lien on personal property is passive, that is, unlike the execution process, it does not disturb the debtor's possession and use of property. Accordingly, judgment liens, where possible, may better serve the interests of both judgment creditor and judgment debtor than execution or garnishment because they are less likely to precipitate the filing of a bankruptcy petition by the judgment debtor. 

     Judgment lien in hand, the now secured creditor may simply wait, all the while interest accruing on the unpaid judgment.  If and when the debtor wishes to sell or refinance property subject to the judgment lien, the buyer or the refinancing lender, unwilling to take interests subject to the judgment lien, will typically require that the proceeds of the sale or refinancing be first applied to satisfaction of the judgment (including accrued interest) secured by the judgment lien.

     Some judgment debtors seek to place their property beyond the reach of the processes described here by conveying property to others. Some of these conveyances will be fraudulent and may be undone or ignored by the judgment creditor under state law provisions governing fraudulent conveyances. Examination of fraudulent conveyance law is beyond the scope of these materials. Sophisticated asset protection strategies, such as the use of foreign trusts, are also beyond the scope of these materials.

     State law protects some property from the reach of the judgment creditor seeking to enforce a money judgment. Property so protected is known as exempt property.  Federal law other than federal bankruptcy law also protects some property from the reach of a judgment creditor (e.g. benefits of retired railroad workers, veteran's benefits, social security benefits, and certain property of military personnel).  The protection is extended to property of individual debtors, not to the property of corporations, partnerships, limited liability companies, or other legal entities.  The Bankruptcy Code, which is also federal law, protects some property of an individual debtor against all unsecured creditors (whether or not they are seeking to enforce a judgment) in the event that the debtor files a bankruptcy petition. 

     The nature and amount of property protected varies widely among the states. The exemption law of some states, such as the law of Texas and California, is generous; the exemption law of other states, such as Pennsylvania, is penurious. Typical state exemption laws protect some portion or all of the debtor's equity in a principal residence (known as the homestead exemption), in wearing apparel, household appliances and furnishings, in an automobile, in tools of the trade, in health aids and prosthetic devices, in jewelry, and in the benefits of a life insurance policy. Federal law (other than the Bankruptcy Code) and law in some states also protects a substantial amount of unpaid wages. 

     Consider the following example of how an exemption works. Suppose Valerie Victim has a judgment against Tom Tortfeasor for $50,000. Tom owns real property in California that he uses as his principal residence. An appraisal of the residence would reflect a fair market value of $150,000. The residence is encumbered by a deed of trust securing a debt of $120,000. Thus, Tom's equity in the residence is presently $30,000. Assume that California protects $45,000 of an individual debtor's equity in a residence. Valerie would be precluded from forcing the sale of Tom's residence through the execution process because the amount of his exemption exceeds the amount of his equity in the residence. However, she could still record an Abstract of Judgment to create a judgment lien on the real property, hoping that eventually Tom would refinance or sell, generating proceeds to pay her lien, or hoping that the equity in the property grows (either through appreciation of the property or the reduction of the debt secured by the deed of trust) such that the equity is no longer fully protected by the exemption.  She would not be precluded from forcing the sale if the residence were worth $250,000, although Tom would receive $45,000 from the proceeds of any forced sale prior to payment of any proceeds to Valerie. Valerie would also not be precluded from forcing the sale if Tom's real property were improved by a factory rather than a residence or if the real property were owned by a corporation or partnership, because in either event the exemption would not apply to the real property.

     Detailed exploration of state exemption law is beyond the scope of these materials. But it is important for you to understand that exemptions from the enforcement of a money judgment by a creditor do not protect a debtor from the enforcement of consensual or statutory liens.  Suppose, using facts from the foregoing example, that Tom failed to make monthly mortgage payments to the lender whose debt was secured by the deed of trust on the residential real property. The lender would be able to foreclose on the residence (i.e. force its sale either in a judicial foreclosure sale, to be distinguished from an execution sale, or in a private sale pursuant to powers given in the deed of trust); the homestead exemption would not protect the debtor against enforcement of the consensual lien. On a moment's reflection, the reason for this should be obvious. When Tom obtained a loan to purchase his residence, he granted the lender a lien to secure his promise to repay the loan; the lender would not have made a loan but for this security. Tom is not thereafter permitted to assert an exemption to prevent the enforcement of a lien that he granted. Similarly, if Tom brought his car to an automobile mechanic for repair and refused to pay for the repair, the mechanic would have a statutory lien, dependent on possession, on the automobile and could sell the car to satisfy the repair bill. Tom could not resist the sale by asserting an exemption for equity in an automobile.

     In summary, exemptions protect some property of individual debtors against enforcement of money judgments by unsecured creditors but not against creditors seeking to enforce consensual or statutory liens. For those of you who play cards, another way to think of this is that consensual liens trump exemptions.