Every working day, civil courts in the U.S. render monetary judgments against lawsuit defendants. Defendants become judgment debtors by virtue of losing their cases. Immediately thereafter, they are obligated to make payment arrangements. It is in a debtor’s best interests to pay as quickly as possible.
Unfortunately, immediate payment is not the norm. Judgement creditors (the winning parties) often need to pursue collection efforts for months or years after the fact. Meanwhile, what many debtors do not know is that their outstanding debts are accruing interest.
Statutory Interest Accrual
Here in the U.S., federal law allows for statutory interest accrual on all lawful debts. This includes monetary judgments. Furthermore, interest on unpaid amounts continues accruing until the debt is paid in full or otherwise satisfied.
Judgments rendered in federal court accrue interest at a rate equal to the weekly average one-year yield on U.S. Treasury bonds. Judgments rendered in state courts are subject to interest rates as established by state law. The rate might be 10% in one state but just 8% in another.
When Accrual Begins
The nice thing about statutory interest accrual is that judgment creditors don’t have to do anything to get the ball rolling. Interest begins to accrue on the date a judgment is entered. However, ‘entered’ means different things in different states. Some states consider a judgment entered as soon as the judge’s gavel falls to conclude a case. In other states, a judgment is not entered until the court clerk officially records it.
Either way, interest begins accruing as soon as a judgment is official in the eyes of a law. This benefits judgment creditors in that they stand to earn a bit more for the trouble of having to wait to get paid. It is also motivation for debtors to pay as quickly as possible.
Interest Adds Up
The experts at Salt Lake City’s Judgment Collectors, a collection agency that specializes exclusively in judgments, say that interest accrual is not always sufficient motivation to pay. That surprises me, given the fact that interest adds up over time.
A simple enough example to understand is a debt that starts out at $100 with an annual interest rate of 10%. The total interest on the first year of the debt is $10. So if the debtor makes no payments, the debt climbs to $110 the second year. Interest payments for that year are $11. At the start of the third year, the debt is now $121.
For every year the debtor does not pay, the debt grows by 10%. But it is 10% of the current balance, not 10% of the original debt only. This means interest compounds year after year. The longer a debtor waits to pay, the more he ultimately owes.
Making Monthly Payments
Even if a judgment debtor cannot pay 100% of what he owes immediately, it is still smart to work out some sort of monthly payment plan. Making monthly payments slowly chips away at the amount owed. As a result, the total amount of interest paid is also reduced.
Whenever you are talking about debts and interest payments, time is the enemy. The longer it takes to pay what is owed, the higher the total interest payments will be. On the other hand, taking less time to pay ultimately means paying less interest in total.
Judgment creditors do not have many advantages when it comes to collection. But they do have an advantage where interest is concerned. Thanks to federal and state laws, interest on unpaid judgments begins to accrue on day one.
