The states generally allow judgment creditors to charge interest for as long as a money judgment remains outstanding. This is true even if a creditor domesticates a judgment in a neighboring county. But what about domesticating in another state?
Unless there are specific rules in a given state to the contrary, domestication has no impact on interest. Even California, one of a minority of states that has its own domestication process, recognizes interest imposed on a judgment in its state of origin.
Recognizing interest and its calculation across the states is a direct result of the Constitution’s Full Faith and Credit Clause. This particular constitutional clause mandates that states recognize legal proceedings from other states unless they have a compelling reason not to.
Interest on the Original Judgment
Although the Full Faith and Credit Clause compels states to recognize interest imposed on in judgment from another state, each state has its own calculation for determining interest rates. For purposes of illustration, let us assume you have an outstanding money judgment in California.
State law allows you to collect interest. Unless otherwise specified in the language of the judgment, California relies on a simple 10% annual rate for outstanding judgments. Now, let us assume your debtor comes to Utah and sets up a business. You plan to use all the applicable collection tools once your judgment is domesticated here.
The state of Utah, and whatever county you target for domestication, must honor the interest portion of the judgment. But interest is not recalculated according to Utah’s standards. You continue using California’s calculation because that was the original calculation in the original judgment.
Interest Is Calculated Annually
Interest acts as an additional amount of compensation to make up for the fact that a judgment debtor does not pay right away. The beauty of the interest concept is that it is calculated annually based on the outstanding balance. So again, let us illustrate.
Let’s say you have an outstanding judgment against another party valued at $100k. For the first year, his interest payments at 10% amount to $10k. Now, assume his outstanding balance is just $75k at the start of the second year. You can tack on an additional $7,500 to cover the second year’s interest. You keep doing this until the debt is paid in full.
From the standpoint of a judgment collection agency, interest can be a compelling reason to pay up. Granted, 10% interest does not amount to much on a smaller judgment of a few thousand dollars or less. But as the value of the judgment goes up, interest becomes more significant.
Interest and Monthly Payment Plans
Judgment creditors should also consider that interest can be assessed even when a debtor agrees to a monthly payment plan. Most states require court approval for any such plan, but interest would be allowed if the original judgment called for it. In such a case, the way interest is calculated would be very similar to how it is calculated on a car loan, personal loan, etc.
As a judgment creditor, you might be able to entice the debtor to voluntarily agree to a monthly payment plan by waiving the interest. You would stipulate that no interest would be due as long as the debtor stuck to the plan. But if he deviated from it, thereby forcing you to use other collection methods, interest would be charged once again.
The states allow judgment creditors to charge interest on unpaid balances. Interest is not affected by domesticating a judgment in another state. The state’s honor interest and its calculation without issue.