Whether a judgment creditor seeks to collect in-house or turns collection efforts over to an attorney or collection agency, the person heading up collection efforts usually wants to know about debtor solvency. Solvency, or the lack thereof, plays a key role in determining how to proceed.
If you don’t know what solvency is or how it applies to judgment collection, this post is for you. Needless to say, debtor solvency is something you should understand before enforcing an unpaid judgment. The more you know about it, the better equipped you will be to make wise decisions.
The Definition of Solvency
Solvency can be defined in different ways, depending on how the term is being used. For our purposes, we can look to Cornell Law School. Here is how they define it:
“Solvency refers to the financial health of an individual or business, usually regarding whether the party has more assets than debt.”
For practical purposes, a judgment creditor would want to know the value of a debtor’s assets and income. That amount would be compared against his total liabilities and debts, including the judgment. The debtor is considered solvent if income and assets are more than debts and liabilities. He is insolvent if things are the other way around.
Insolvency Makes Collection More Difficult
Now that you know what solvency is, do you know why judgment collectors care about it? Simply put, a solvent debtor is easier to collect from. They have valuable assets that could be leveraged for payment if necessary. On the other hand, insolvency makes collection efforts more difficult due to limited assets.
Difficult does not mean impossible. As an agency that specializes in judgments, we have seen our fair share of cases involving insolvent debtors. One of the keys to dealing with an insolvent debtor is to consider every possibility. The successful judgment creditor works with whatever he has and makes the best of it.
The Multiple Creditor Problem
Limited assets are just one of the complications associated with trying to collect from an insolvent debtor. Another complication is what we refer to as the multiple creditor problem. In other words, the chances are pretty good that an insolvent debtor has other creditors looking to get paid.
Multiple creditors make judgment collection more difficult. The later a judgment creditor is to the game, the more competing creditors he has in front of him. Competition for limited financial resources can be fierce. It can also lead to more time in court along with mounting legal bills.
Settlements and Payment Plans
Unfortunately, there is no single way to deal with an insolvent debtor that guarantees full payment. Judgment creditors need to work with the cards they are dealt, so to speak. One way to do so is to offer the debtor a settlement and subsequent payment plan. That could be enough to encourage the debtor to pay.
A good settlement is one in which the creditor agrees to accept less than what is owed in exchange for a commitment to pay that lesser amount. Even though the creditor doesn’t get the full amount, getting something is better than nothing at all. As for a payment plan, we have seen more than one case in which offering a payment plan was seen as an olive branch. It ultimately led to the debtor cooperating instead of continuing to fight.
Solvency definitely plays a role in determining how to collect a judgment. In short, solvent debtors are easier to collect from. Insolvent debtors, not so much. They are much harder to deal with.