When an individual or organization successfully sues another person and gains a monetary award, that individual or organization becomes a judgment creditor. What many judgment creditors do not know is that the law considers them unsecured creditors. There is a distinct disadvantage here, a disadvantage we will get into with this post.
More About Unsecured Credit
Creditors in the consumer market offer two options: secured and unsecured credit. Secured credit is something secured with an asset while unsecured credit involves no assets at all. Think of the difference between a mortgage secured by a house and credit card debt not secured by anything.
A monetary judgment is considered unsecured credit because there is no collateral backing it up. It is a lot like credit card debt. On the other hand, a mortgage is secured debt because the lender can turn to the mortgaged property as collateral in the event of default.
Why does this make any difference in terms of judgment collection? Because creditors assume positions of priority when payment is made. The law favors secured creditors over unsecured creditors in nearly every case.
Competing With Multiple Creditors
At this point, you might be totally confused. I suggest checking out the Judgment Collectors website. They recently put up a post explaining the challenges of competing with multiple creditors following a judgment. Their post will fill in a lot of the holes left open here.
That said, imagine you have won a money judgment and are now ready to collect. The party whom you sued, also known as the judgment debtor, has a lot of financial problems. You discover that you are not the only debtor looking to get paid.
Let us say your state allows you to go after the debtor’s car. He also has possession of a family home he turned into rental property. You can go after it, too. But there may be complications. He may be behind on both his mortgage and car payments. In such a case, his mortgage lender would most likely be in the first position to collect. The bank that loaned him money to buy the car would probably be in first position on that loan as well.
At best, you would be in second position. That means you would get whatever was left over after the mortgage lender and bank were paid. Perhaps that’s not so bad. But what if there are still more creditors in line ahead of you?
Why Secured Lenders Are Given Priority
The big question is why secured lenders are given priority. The answer is simple: the loan agreement they signed with the debtor includes language allowing them to place a lien on the debtor’s property. That lien is placed automatically. A lien establishes a financial interest in the property at hand. Courts recognize liens as legal assets.
Secured creditors get priority treatment because their debtors agreed by way of contract language to utilize assets as collateral. By contrast, unsecured creditors take a risk by offering credit without collateral. Their willingness to take such risks should not prohibit secured creditors from getting paid.
Lien Position Matters
Secured creditors are almost always preferred over their unsecured counterparts. As for unsecured creditors, their fate often lies in lien position. The further down the ladder they are, the less likely they are to be paid.
Unfortunately, judgment creditors are unsecured creditors. They take second place to secured creditors in most cases. So when a judgment debtor has a lot of unpaid bills hanging over his head, he becomes a much more difficult debtor to collect from.