Collecting on a Debt in New York State: a practical guide

At some point in the collection process, the debtor may be either forced to settle the debt or voluntarily settle the debt with the creditor. The debtor might not have sufficient assets or income to pay off the entire debt at once.

Arrangements with the debtor may be made pre-suit, post-filing/pre-judgment, and post-judgment. The agreement signed will include several key provisions:

1. Acknowledgement of debt, or admission of liability to the creditor. This provision may also include consent to the jurisdiction of the court.
2. Payment schedule, indicating the amount due per period (usually on a monthly basis), the commencement date, and the number of payments. The agreement will indicate whether interest will be paid upon the settled amount.
3. A provision that, upon the completion of the payments, the creditor will provide the debtor one or all of the following: (i) Stipulation of Discontinuance of the action; (ii) Satisfaction of Judgment; (iii) General Release executed by the creditor; or (iv) release of any liens upon assets (such as restraints on a bank account, mechanic’s lien, or docketed lien against real property).
4. In the event of a default in payment by the debtor, the method by which the creditor may pursue the debt. This may include, where applicable, the right to: (i) commence an action upon default; (ii) enter judgment for the remaining balance less payments made; or (iii) continuation of post-judgment enforcement.
5. Name and address to whom payments will be made by the debtor.

Docketing a Judgment Lien

Once a Judgment has been entered in a court, there are various methods which may be utilized by the judgment creditor to collect the Judgment from the debtor.

Where the debtor owns real estate, a lien may be placed upon the property. This type of lien is referred to as a opens in a new window Judgment lien under Article 52 of the Civil Practice Law and Rules (CPLR).

The Judgment lien is placed upon real estate by the “docketing” of a Transcript of Judgment with the County Clerk’s Office. Once the Judgment is docketed or registered, the judgment creditor may issue an Execution to the Sheriff to levy and sell the real estate, or merely leave the lien against the property until the debtor sells or transfers the property (at which time, the Judgment will likely be paid from the proceeds at closing).

If the Judgment was obtained in the Supreme Court of the county in which the property is located, no further action is required to docket the lien.

If the Judgment was obtained in another court (such as the NYC Civil Court, federal court, Family Court, or District Court), that court will issue for a fee a Transcript of Judgment with a raised seal, which Transcript of Judgment will then be filed with the County Clerk’s Office, at which point the lien will be effective.

If the debtor owns real estate in a different county other than the country in which the Judgment was entered, a Transcript of Judgment should issue from the Country Clerk’s Office in which the Judgment was entered and be filed with the County Clerk’s Office in which the property is located to effectuate the lien.

Restraining an Account

Once the creditor has obtained a Judgment from a court, one of the options for obtaining payment of the Judgment is to restrain funds of the debtor contained in an account.

The process is to serve a “restraining notice” upon the subject bank, as permitted by statute. In turn, the bank then holds the funds contained in accounts belonging to the judgment debtor pending further action on the part of the creditor. This restraint remains in effect upon the funds for a period of one year.

The next step of the creditor is to remove the restrained funds from the bank. This is done either through an Execution issued to a Sheriff or Marshal (since that person is deemed as “enforcement officer” able to obtain the funds), or through a “turn-over proceeding,” where the creditor begins a separate action against the debtor and the bank as a garnishee, requesting that the court direct the garnishee/bank to turn over the restrained funds.

Once the restrained funds are delivered to the creditor through either of the above methods, the accounts of the debtor will continue to be restrained by the bank (where, in the event that new funds were deposited, they would be restrained as well) until the creditor issues a “release” letter to the bank or a Satisfaction of Judgment is filed by the creditor.

Where an account of the debtor is held jointly with another person, it is necessary to file a turn-over proceeding, as the court must determine the respective rights of the account holders to the funds. One defense to the proceeding is that the debtor is a joint account holder only for convenience purposes.

Settling the debt at different stages of litigation

Once the debtor has decided to settle and/or satisfy the debt, certain processes must be followed. The process of documenting the settlement of a collection case during different stages of the collection cycle is as follows:

1. Pre-suit: If a court action has not been brought to collect the debt as of yet, the debtor (or debtor’s counsel) will normally insist upon receiving a General Release from the creditor, releasing the debtor from all claims. Along with the executed General Release, the creditor may be required to report the debt as settled or satisfied on the debtor’s credit report.
2. Post-suit but pre-judgment: Once the creditor has filed an action, the settlement of the debt will include the provision by the creditor of an executed General Release and a Stipulation of Discontinuance with prejudice (thus, dismissing the court action). The term, “with prejudice,” means that the creditor cannot bring an action upon the debt again. Any counterclaims asserted by the debtor against the creditor will also be deemed waived and dismissed as part of the Stipulation of Discontinuance.
3. Post-judgment: Once a judgment has been entered against the debtor, the settlement will include a Satisfaction of Judgment, to be filed by the creditor with the Clerk of the Court. If the judgment was “docketed” with the County Clerk in a particular county (thereby effectuating a lien upon the debtor’s real property), an official certified copy of the Satisfaction of Judgment should be filed with the County Clerk as well to ensure the discharge of the lien. It is also possible to stipulate to vacate the judgment as well.