Collecting a Debt


Today TaxMama® hears from Joe in the TaxQuips Forum, with a reasonable question.  “I am going after an ex client that owes me $11K. Once you get the judgment how do you go after their assets? Does a lawyer handle that?”

Dear Joe,

No doubt, each state has different rules.

But if you know where the assets are – like the employer, or major clients (accounts receivable), or bank account numbers, or vehicles….give the SPECIFIC information to the officers working with the court.

Here in Los Angeles, we have Marshall or Sheriff with an office in the courthouse.  We fill out their form with the specific information on where to find specific assets (account numbers, addresses, etc.). We pay the fee. They go get it. Once they have it, they hold it for 30 days. Then they turn it over to us.

Incidentally, for a slightly higher fee, the officer will sit in the deadbeat’s office all day, embarrassing the person, and collecting all the money that comes in the mail, money from customers or clients who walk in, etc.

All these costs are added to the judgment. So, while you advance the money, the person you’re suing has to pay it. Plus interest on the judgment.

Incidentally, if you don’t quite have the judgment yet, you could ask the court to insist he provide a list of his assets (discovery). Read this terrific article about discovery in a divorce case.

Do a little research and look up the rules in your state. And remember, when suing a business, be sure to also name the individual owner(s) in the lawsuit as well. So, if the business is dissolved, you can still collect from the owner(s) assets. (Note: If it’s not appropriate to include the owners, the Court will remove them. But will rarely add them.)

And remember, you can find answers to all kinds of questions about collecting judgments, and other tax and business issues, free. Where? Where else? At www.TaxMama.com.

 

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4 thoughts on “Collecting a Debt

  1. TaxMama says:

    Oh Mike,
    My heart breaks for you.
    Yeah, besides the monetary loss – 32 years of your life.
    That’s the real crime – that they turned something so meaningful into this silly mess.

    NOTE TO FOLKS BUYING BUSINESSES.
    When a healthy business starts to do poorly, consider inviting the previous owner/founder to help bring it back to life. The person who built it may be able to guide you towards making it successful again.

    Well, Mike, the real estate market is turning around.
    I pray that it rises just for you.

    Hugs
    Eva

  2. Mike says:

    Eva,
    Both your promptness in responding and year detailed approach are amazing. And to think all this was done during your busy season !!!
    Anyhow, the bad news is that the business was sold and accounted for in the 2003 tax year returns. The last time any part of this sorry mess appeared on my tax returns was in 2007 when that partial third payment from them was accounted for. Nothing since.
    At the time things were falling apart my lawyer told me I did have the option to make monthly payments on the mortgages but that was impossible. As you may have guessed, this who thing is way above my pay grade and I had best start scouring my area for a CPA well versed in repossessions. The house will eventually sell and that is when I’ll need an expert to prepare the tax returns as I bid farewell to my 32 year old business and walk away all the wiser.
    Thanks again, Eva.

    Mike

  3. TaxMama says:

    Hi Mike

    Thank you so much for the kind words.
    And your story.

    I’ve seen this kind of thing happen to other people, as well.
    Folks like you, who have built up a valuable business – then sold it someone, while carrying the note yourself.

    THEY run the business into the ground.
    You don’t get paid after the first couple of years.

    Yes, you were smart to secure the note against their property.
    But not in third position. Never.
    (To protect your interest, you had to keep paying the other mortgages.)

    That’s why, I would never recommend selling the business this way.
    You didn’t even have time to save it.

    THIS SHOULD BE A WARNING TO ANYONE SELLING!
    DON’T CARRY THE PAPER YOURSELF.
    (If you must, make the price high enough that you can afford to sell the note.
    There are folks like JG Wentworth advertising on the TV who are happy to buy notes and structured settlements.)

    But…there may be hope for the property.
    OK. what now.

    You have your original Form 6252 where you reported the original sale and the GROSS PROFIT PERCENTAGE of the sale.

    Your options.
    1) If it’s not more than three years since you filed the tax return for the original sale, consider filing an amended return and report a lower sales price, reflecting what you have actually received. Include a higher cost of sale for all these additional costs you have expended. Your gross profit percentage will be lower. Also, look at your interest income and see if that is now different?

    2) Wait until the property sells. Then do a worksheet recomputing the gross profit percentage. Deduct the profit you have already reported.
    You will make the adjustments to the Form 6252 and possibly to Schedule B.

    3) There may be some other options in-between.

    This is complicated even for a tax pro. See if you can find a tax pro who is VERY familiar with how to handle repossessions. Back in the 1980s when the real estate market collapsed, I was THE expert in this area. But I haven’t done one of these for a while.

    Let’s see if anyone speaks up and claims to be an expert.

    I DO hope this works out better than you expect.

    Hugs
    Eva

  4. Mike says:

    Hello, Ms. Rosenberg.
    I just read today’s tax quips about Joe who was seeking to enforce a judgment on an ex client. This struck home with me because I am involved with issues that parallel Joe’s.
    Just before I retired I sold my small service business (equipment and client list) to a young couple. I allowed them to finance most of the amount over 7 years provided I hold a lien on their house. They agreed but my lien stood in third position after two bank mortgages. At the closing and transfer of my business they paid a small lump sum down and contracted to pay me the balance with interest over 7 years. The first 3 years they paid but then defaulted. My lawyer foreclosed on them. They responded by declaring bankruptcy. Further, due to business and marital problems theyran the business into the ground and also divorced. The process of bringing their house to a sheriff’s sale has been going on for about 4 years now due to the poor housing market. It now looks like the sale of the house is getting closer. Realistically, I have no hope of any recovery due to the lower value of house and the two banks ahead of me. Now my question.
    In the year that the house is finally sold, may I take a loss on the remaining principal and ongoing interest marked from the time I foreclosed on the property ? If so, would this loss be on Schedule C ?
    In closing I want to thank you for the time you devote to the “little guy” in making tax issues clear and understandable.

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