There are a number of alternative ways to enforce a judgment debt. This article is designed to assist a judgment creditor to select the most cost-effective and efficient way of converting a judgment debt into actual money paid by the debtor.
Note that bankruptcy proceedings and the winding up of a company are not means to enforce a debt. These processes relate to the solvency of an individual or a company. A Court will not order the payment of money by a judgment debtor as a result of commencing bankruptcy or winding up proceedings. Rather, a trustee in bankruptcy or a liquidator will be appointed over the insolvent entity.
In practice, if the enforcement procedure outlined below fails to secure payment of the debt, it may be reasonably concluded that the individual or company is insolvent and that bankruptcy or winding up proceedings are the most appropriate path forward. It can, however, be an abuse of the Court’s process to use bankruptcy and winding up as a debt recovery tool and the judgment creditor risks having a serious costs order made against it.
Background
An order of a Court or Tribunal which requires the payment of money by a debtor is called a judgment debt. The successful party is called the judgment creditor and the person owing the money is the judgment debtor.
There are different pathways to obtaining a judgment debt:
- Where a defendant has been served with a Statement of Claim but fails to file a Defence within 28 days of service, the plaintiff can apply to the Court for the entry of default judgment;
- The parties may agree to enter judgment as part of their settlement terms. These will then be endorsed by the Court and become a final judgment.
- Where the matter runs to a full hearing, the Court or Tribunal will give a final and binding determination on the matters raised in the Statement of Claim. This is also a final judgment.
The Judgment may be challenged
A default judgment can be set aside by the Court on certain grounds. Where a defendant can show that they have reasonable grounds of defence and can explain the delay in responding to the Statement of Claim, the Court will generally set aside the default judgment. A final judgment may be subject to an appeal and further legal proceedings. However, if neither of those things occur, the judgment is then ready to be enforced by the successful party.
Timing of enforcement
Ordinarily, the judgment debtor is given 28 days from the date of judgment to pay the judgment debt. Interest begins to immediately run on the judgment debt pursuant to statute and is currently 7.25% per annum. The judgment debt, plus interest, can be enforced after the 28-day period expires.
In New South Wales, the judgment creditor has 12 years from the date of the judgment to commence the enforcement procedure.
Payment by Instalments
The judgment debtor may approach the judgment creditor directly or apply to the Court for an order that the judgment debt be paid by instalments. If a Court application is made, the judgment debtor must present to the Registrar evidence of their financial position and capacity to pay.
A judgment debtor doesn’t need to serve the judgment creditor with a copy of its application to the Court. Rather, the judgment creditor will be served by the Court with a copy of the Court’s orders either granting the instalment order or rejecting it. Once served, the judgment creditor has 14 days in which to object to the instalment order. If an objection is received within that time, the Court lists the matter for further argument. If no such objection is received, the instalment order is finalised. The judgment creditor is then unable to enforce the debt further less the judgment debtor defaults in making one of the instalment payments.
As a rule of thumb, if the debt plus interest will be paid within approximately 2 ½ years, the Court will usually make the instalment order. If therefore, a judgment debtor contacts a judgment creditor directly and offers payment terms within the Court’s rule of thumb, that offer is worth considering in order to avoid incurring further legal costs but achieving no better outcome.
Garnishee Orders
Garnishee orders are a very effective way for a creditor to be paid. It is possible to garnishee the debtor’s bank account, their wages and other sums due to them such as rent. A garnishee order is an order of the Court made against a third party (usually an employer, a bank or a real estate agent) and if that party fails to comply with the Court’s order, they may themselves be held liable for the debt. The Court’s orders need to be served on the third party along with a specific notice giving the garnishee information on when and what they need to do. When the garnishee makes the payment, they also need to advise the judgment creditor the amount paid to the judgment creditor, the amount withheld pursuant to the legislation and how much has been retained by them for their expenses.
(i) Bank account
Garnisheeing a bank account can result in a large portion of the debt being paid off in a lump sum. The judgment creditor does not need to advise the judgment debtor that they are attempting to garnishee their bank account. They do however need to swear a declaration and file it with the Court stating that they believe the judgment debtor holds an account with a particular bank and state the grounds for holding such a belief. It is no longer possible to simply garnishee the “big five” banks in the hope that the judgment debtor holds an account with one of them. Very often, however, the judgment debtor will have disclosed their banking institution on a credit application, so it is worth checking historical documents.
A limitation in garnisheeing a bank account is that the judgment debtor may close the account once they become aware of the garnishee order. The timing of issuing the garnishee is therefore important as the once-bitten-twice-shy judgment debtor is unlikely to advise the judgment creditor of its new bank details.
(ii) Wages or salary
The judgment creditor can seek an order of the Court requiring the judgment debtor’s employer to pay the judgment creditor directly from the employee’s wages. While there are some restrictions on the amount that can be deducted from the employee’s wages in each pay cycle, the order continues to remain in effect until all of the debt is paid off.
(iii) Rent
If a judgment debtor is receiving rent from a property, the judgment creditor can issue a garnishee to the real estate agent garnisheeing the ongoing rent payments plus any money held in a trust account until the full amount of the judgment debt is paid.
Examination
To obtain a garnishee order, the judgment creditor requires information about the judgment debtor. One way of finding out more information is to issue the judgment debtor with an Examination Notice. This notice requires the debtor to find information with respect to their income, assets (including land, vehicles and bank accounts) and liabilities. It may also require them to produce certain documents to you such as bank statements, mortgage details, credit card statements, registration papers for any motor vehicle, evidence of stocks or shares, utilities bills and wages records. Both an individual and a corporation may be examined.
If a debtor does not adequately respond to an Examination Notice, the judgment creditor may complete an affidavit and file an application with the Court for an Examination Order. The application must state how much of the judgment debt is outstanding and may include the costs of making the application, including the Court filing fee, professional fees and the service fees. The Court may then order the judgment debtor to attend Court to answer questions under oath with respect to their income, assets and liabilities. The Examination Order must be personally served on the debtor at least 14 days before the matter is listed in Court. If the debtor does not attend Court, the Court will send them a notice scheduling the examination. If the judgment debtor does not attend at the adjourned examination, the Court may issue a notice to the debtor stating that any further failure to attend may result in their arrest. The debtor then has 14 days to respond to the Court. If no response is received, the judgment creditor may apply for the issue of an arrest warrant.
Writ for the levy of property
If a judgment debtor owns personal property, including a vehicle, a judgment creditor can apply to the Court for orders that the Sheriff attend the debtor’s address, seize such property, sell it at auction, and pay the proceeds to the judgment creditor less 3%, which the Sheriff’s Office retains. The property must be owned by the judgment debtor (not leased or hired) and there are certain items that are exempt such as essential household appliances, furniture, clothing and tools of trade. In practice, we often find that the auction value of the judgment debtor’s goods is not high, but the attendance by the Sheriff at the property prompts the judgment debtor to make immediate arrangements to pay the debt, usually by instalments.
Conclusion
There are a number of ways that a judgment creditor can enforce a judgment debt. It is important to consider all options before proceeding down any particular path and to try to choose the route which is the most likely to be both cost-effective and successful under the circumstances. This article provides a guide only and is not a substitute for legal advice. Whether you are a judgment creditor or a judgment debtor, it is important to obtain legal advice from a qualified professional.
