Do you have a judgment that you have never collected on? If so, it is worth more today than when you obtained it. All judgments accrue interest as a matter of law. Some judgments accrue interest based on a contractually stated rate, if they resulted from a written agreement. If the matter did not arise from a contractual agreement, the interest on a judgment accrues based upon the statutory rate set forth in A.R.S. § 44-1201.
If your judgment was obtained prior to 2011, the interest rate was 10 percent. In 2011, the legislature changed the law on the amount of interest allowed in a judgment. Currently, unless the judgment is the result of a loan or a contract specifying a specific interest amount, the interest accrued on a judgment is reduced to the interest rate of 4.25 percent per annum (one percent plus the prime rate). As a result, the money that you are owed on a judgment is more as time goes on and a judgment inherently becomes more valuable.
There is one catch, though. Judgments are only good for five years in Arizona. Prior to their expiration, they have to be renewed. If you have a judgment that is not renewed, the judgment is considered to be “stale” and is unenforceable. Renewing a judgment is a relatively simple task. An affidavit accompanied by the appropriate filing fee must be filed with the issuing court before it expires. This can be done up to 90 days before the expiration of the judgment. At that point, the judgment is good for another five years. Judgments can be renewed indefinitely but each time, they have to be renewed before they expire; otherwise, they are worthless.
If a judgment is being renewed, it is probably because you have been unable to collect on it and you are hopeful that someday the debtor will have some money or assets to collect from. Sometimes, this is a successful tactic. Although such a tactic is not an offensive one, waiting for the right moment when the debtor has money, needs a loan or needs to repair his or her credit score for some reason are all common examples that can lead to the debtor approaching the judgment holder and looking to settle up. If this happens, you have the right to collect the interest that has accrued on your judgment, in addition to the other sums that are owed.
Most people would prefer to avoid getting a judgment in the first place. But if you are unlucky enough to have to obtain one and cannot collect on it, a judgment can be of additional benefit, tax wise. The IRS allows for a deduction of uncollected judgments when certain conditions are satisfied. In order to deduct a judgment, you will have to show that you made a reasonable effort to collect on it. This usually means that you did more than just obtain the judgment and sit on it. Then you will have to offset it as a bad debt or a loss. If you sold goods or services to your debtor, you must have already included the money owed as income on a tax return. If you are trying to collect on a loan, you must prove that you actually loaned the money. Bad business debts are subtracted from gross income; bad non-business debts are taken as capital losses. Every circumstance is different and your tax specialist will be able to help you determine how best to deduct your judgment.
Failing to get paid amounts you are owed is always frustrating. But rather than just allowing your money to eviscerate into a black hole, it is often worth taking the small steps necessary to obtain a judgment. In the case where a debt is uncontested, the costs for obtaining a judgment are minimal. But having that judgment gives you the ability to assess interest on the debt in the event you are able to collect and it gives you the potential to write it off with your taxes. As a result, pursuing a judgment can be well worth its value. FBN
By Tevis Reich
Tevis Reich is the owner of a boutique law firm, Law Office of Tevis Reich. He is admitted to practice in Arizona and Florida, in both state and federal courts. Reich is a Flagstaff native and an NAU alumnus. He can be reached at 928-213-1800 or via email at Tevis@TReichLaw.com
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