Bankruptcy And Settlement Agreements

August 9, 2023

I am not a lawyer, I am the nation’s only Judgment Broker. This article is my opinion, and not legal advice, based on my experience in California, and laws vary in each state. If you ever need any legal advice or a strategy to use, please contact a lawyer.

Settling a judgment means that a judgment debtor and the judgment owner reach a compromise to satisfy their judgment for an amount that is less than the full (often theoretical) amount owed.

The advantages for the creditor are that they save time, money, and hassles; because conventional judgment recovery is not easy or cheap. The advantages for the judgment debtor are that they save hassles and money, because they get the judgment against them satisfied quickly, by paying much less than the total amount owed.

Settlements between judgment owners and debtors can happen anytime, however it usually takes a long time. In the beginning, the debtor often thinks they will never have to repay the judgment, and the creditor thinks their judgment is guaranteed and will be easy to recover in full. Settlements are almost always between those two boundaries.

Sometimes differences are settled, before a cause of action is brought to court. Some settlements are reached while legal proceedings are progressing in court. Other settlements are reached after the judgment is final.

Settling judgments is a good idea, because most judgments are never recovered. Getting 50% of what is owed is a lot better than getting 100% of nothing. Settling can be the easiest way to recover a judgment.

It does not matter who starts a settlement discussion, what matters is that both sides are honest and quickly follow up on their obligations. The debtor pays the creditor, the creditor then satisfies the judgment. With any negotiation, there is a chance that with some give and take, both parties can find a way to reach a settlement agreement that is a win-win.

Many times, settlements are impossible because either debtors are merely trying to trick the creditor, or the creditor refuses to understand that judgments are not cash (and will not compromise), or that the debtor is not willing or able to pay enough to make a reasonable settlement offer.

Post-judgment, there seems to be no such thing as a Judicial Council judgment settlement form. Most settlements are crafted by attorneys for each unique settlement situation. The terms and conditions of settlement agreements are hammered out among the parties or their representatives. The success of any settlement negotiation hinges on both parties believing that settlement is best for them both.

Most settlement agreements are long and complex, however they do not need to be. No matter how solid a contact is, it is only as strong as the weaker of the two sides signing it. After all, most of the time, the judgment debtor cheated the creditor in some way, which was the cause of the lawsuit and/or judgment.

Settlements are contracts that usually mean very little, until the payment transaction is successfully completed. If the creditor defaults on their contractual obligation, it will be easy for the judgment debtor to sue them and get a new judgment against the creditor.

If the judgment debtor defaults, the creditor gets burned, because they do not get paid, and because their good-faith agreed settlement amount may (debatably) become the new amount the creditor could claim as being owed in the future, especially in a bankruptcy or appeals court. Some settlement agreements include provisions stating that if the judgment debtor defaults or files for bankruptcy protection, the original amount still stands, and will be enforceable.

Sneaky judgment debtors often agree to settle, and sign a settlement agreement, however they do not actually pay the creditor. Creditors should never satisfy a judgment until the funds clear. It is usually a good idea to meet your judgment debtor at their bank, and watch them get the cashier’s check to pay you.

In California, a judgment debtor exam creates a one-year “silent lien” on all their personal property, which might make you a secured creditor if they later file for bankruptcy protection. So, the first time a talk of settlement comes up, why not serve a judgment debtor exam on them? The one-year debtor examination lien creates a stronger lien than a UCC lien does in bankruptcy court.

To fulfill a judgment settlement agreement, the debtor must pay the creditor, not pull any tricks, and not go bankrupt soon after paying the creditor. The creditor must satisfy the judgment after payment is secured.

When you have a judgment debtor that has a history of tricking you, you may want to try to get them to agree to things to secure the deal. Having them put you on a deed of trust to their home gives you a clumsy, hard to recover from kind of security. A personal guarantee from a scoundrel does not mean much.

If your judgment debtor is a company, maybe you can have the person you are dealing with on behalf of the company, offer their personal liability. You could try a stipulation and a proposed order amending the judgment to add them as an alter-ego, or you could file a motion and have them agree to not oppose it. Another possibility is an agreement and confession of judgment. You can load up the agreement and proposed judgment with recitals as to the owner’s conversion of monies and fraudulent transfers to make it harder for them to discharge it with a new bankruptcy.

If you are not an attorney, your filing the complaint will have little, if any, credibility. Likewise, as soon as you file a fraudulent transfer complaint on real property, you will promptly want to record a lis pendens as to the subject property. It is far easier for an attorney to do this than a pro per litigant.

If necessary, the attorney would also file the complaint and issue and record the lis pendens. At that point, you could sub-out the attorney. The cost would probably come out being worth it in the end, especially if having the attorney gives you the credibility necessary to facilitate a settlement before the lawsuit is filed.

What if the judgment creditor gets paid, cashes the check, waits until it clears, satisfies the judgment; and then the debtor files for bankruptcy protection? The “Achilles’ heel” of a settlement agreement occurs when the debtor pays the creditor, and then files for bankruptcy protection. The typical bankruptcy look back period is within 90 days after the creditor gets paid.

Making settlement agreements bankruptcy-resistant is beyond the scope of this article. Consult with a lawyer, and search on the web for “How to Bankruptcy-Proof Your Litigation Settlement Jerrold S. Kulback”.

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