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Enforcing Judgments in California for Commercial Creditors

There are a number of steps that creditors with commercial debts can take to enforce judgments they have received against businesses that owe them money. (Consumer debt collection is much more regulated and is not addressed in this article.) Collection agencies generally work on a contingency-fee basis, often charging 25% to 40% of the amounts collected. Where the amount owed is larger (at least $5,000 or more), there is an attorneys' fees clause and the debtor has assets (and particularly where the creditor has a security interest in some or all of those assets), it may cost less in the long run to hire an attorney on an hourly basis for collection.

Debts incurred primarily for business purposes are not (unlike consumer debts) subject to the federal Fair Debt Collection Practices Act or the California Fair Debt Collection Practices Act.

Enforcing Judgments Entered in States Other than California

(If you already have a California judgment, you may want to skip ahead to the next section.)

If the creditor already has a state-court judgment from a state other than California, the first step is obtaining a sister-state judgment from a California court. (If the creditor has a final federal-court judgment entered outside California, the judgment may be enforced by registering it in a federal-district court in California, and then enforcing it just as if the judgment had been entered there in the first place.)

The process of obtaining a sister-state judgment is initiated by filing an application for entry of judgment with a California court. The application should be filed in the county where the business's primary office is located – but it can be filed in any county if the business is a "nonresident". A copy of the original judgment that has been properly authenticated by the court issuing it must be attached to the application. Once the application is filed in California, the court clerk must enter judgment.

If there is the potential for great or irreparable injury (e.g., the debtor is concealing or transferring assets, is on the verge of insolvency, or intends to leave California), the application can request that the Court issue a writ of execution or other enforcement immediately.

In any case, notice of entry of the judgment must be served on the debtor in the same manner as a summons and complaint. Unless the creditor has obtained a writ or other means of enforcement based on potential great or irreparable injury, the creditor must then wait 30 days before commencing enforcement proceedings, including obtaining issuance of a writ of execution, obtaining and recording an abstract of judgment for real estate, or filing a judgment lien on personal property. If the debtor does not file a motion to vacate the judgment within the 30-day period, enforcement of the judgment proceeds just as with a judgment that was obtained in California originally.

Writs of Execution

A writ of execution is a key tool for enforcing a judgment. The debtor does not receive any advance notice of this, so generally will not find out about it until it is used to seize the debtor's income or assets.

A separate writ of execution must be issued for each county in which a levy is to be made. As a result, immediately upon entry of judgment it is often best to obtain a separate writ for each county in which the debtor has a place of business or assets. Each writ is good for 180 days and can be immediately renewed. Multiple levies can be based on a single write of execution. Levies can be issued against bank accounts, accounts receivable, personal property, etc., although intangible personal property (bank accounts, accounts receivable, notes, etc.) often should be pursued first because it is more expensive and more complex to levy on tangible personal property (inventory, equipment, etc.). Still, if the debtor has an ongoing business, a levy on inventory or installing a keeper may be highly effective, although expensive.

If time is of the essence – for example, due to concerns that the debtor may dispose of or harm the collateral – the writ of execution can be sought on an ex parte basis, which is faster than the usual process. In addition, at the same time a temporary restraining order can be sought ex parte against the debtor as an "and/or" alternative to provide protection in case the Court declines to issue the writ of execution ex parte.

If the debtor is hiding assets or keeping them at home, or the assets are outside of California, then a "turn-over" order can be obtained from the Court directing the debtor to transfer the property to the levying officer. This type of order is enforceable by contempt of court, which can make it more effective than levying on property. Because of this, a turn-over order must be served on the debtor personally. This type of order cannot be used with third parties, although a third party holding property of the debtor can be served with a copy of the writ of execution and notice of levy.

It is also possible to obtain a seizure order if the property is being kept at a private residence or other "private place". (A levying officer cannot seize such property without a court order.) In addition, it is possible to obtain an order appointing a receiver or ordering the levying officer to take action needed to preserve the property, for example, to keep a debtor from spending or transferring accounts receivable as they are received.


Of course, the debtor may declare bankruptcy. Entities (corporations, LLC's, etc.) may file either a Chapter 7 bankruptcy (liquidation) or a Chapter 11 bankruptcy (reorganization with the intent of keeping the business going). Individuals (which include sole proprietorships) may file either a Chapter 7 bankruptcy (liquidation) or a Chapter 13 bankruptcy (sometimes called a wage-earner's plan), with the latter often used to prevent foreclosure of a personal residence.

The first things to be done in a bankruptcy are to file a request for special notice (to guarantee receiving notice of all hearings, etc. in the bankruptcy) and to file a claim for the debt, unless the debtor has the amount and type of debt and the value of any assets securing the debt correctly listed in the schedules the debtor files or the bankruptcy is a no-asset Chapter 7.

A secured creditor has a large advantage in bankruptcy. Claims (debts) in a bankruptcy are broken into three categories. Priority claims, which include the costs of the bankruptcy proceeding (including fees that must be paid to bankruptcy trustees) and most taxes, take first priority over everything else. The second category is secured claims; a secured creditor has the right to be paid from the security, assuming there are enough other assets to pay the priority claims. If the value of the assets securing a secured creditor's claim are not worth enough to cover that entire claim, the creditor is a secured creditor up to the value of those assets and an unsecured creditor with respect to the remainder. The third category is claims that are not secured by any assets.

In a Chapter 7 liquidation, the assets are sold (with certain exceptions for individual debtors like "tools of the trade"). Then the priority claims are paid first, the secured creditors are paid to the extent the value of the assets securing their claims cover those debts, and the remainder is paid pro-rata to the unsecured creditors.

In a Chapter 11 reorganization (for entities) or a Chapter 13 plan (for individuals), a repayment plan must be approved. The repayments are generally made over three to five years. The plan does not have to pay unsecured claims in full as long as long as unsecured creditors receive at least as much under the plan as they would if the debtor's assets were liquidated.

In a Chapter 11 reorganization or a Chapter 13 wage-earner's plan, the debtor is not supposed to use any "cash collateral" (such as accounts receivable) securing a secured creditor's claim unless the debtor receives Court approval. In those situations the creditor can require that it be "adequately protected". Some debtors, though, use cash-collateral without Court approval. If that is occurring, the creditor may need to file a motion for adequate protection to protect its collateral. (Creditors have an opportunity to vote for or against payment plans, but the process can be complicated and will not be discussed here.)

If the bankruptcy is dismissed (which can happen if the debtor does not file the appropriate schedules or act in accordance with the bankruptcy rules), then collection efforts resume back in the state court.