Lump Sum Payment vs Payment Plan

If the other party owes you money as a result of a small claims case, the other party may request from the court to pay the judgment in smaller payments, known as a payment plan.

You will typically be notified of this request and can choose to contest this request.

When debtors lose their small claims cases, and the judgments against them have ordered them to pay the creditor a certain amount of money, they can ask that the court allow them to pay this judgment amount off over time, in smaller amounts (in installments), instead of all at once (in a lump sum). This plan, under which the court allows a debtor to pay back a judgment amount in smaller chunks, over time, is called a “payment plan.” In California small claims cases, a debtor who owes money due to a judgment can request a payment plan at the small claims hearing (i.e., at “trial”) or at any time after, even if the collections process has already started. Some judges will order a payment plan during the hearing even without the debtor asking for one.

While, at first glance, it might seem like a no-brainer that it’s better for a creditor to have the court order the debtor to pay all at once, rather than under a payment plan, this is not always the case:

• Payment plans may make it more likely for debtors to voluntarily repay their debts since allowing the debtor to pay in smaller amounts over time is normally more realistic than requiring the debtor to pay all at once. Why does this matter? This matters because it is easier to allow the debtor to pay willingly rather than having to go through the long process of getting the court involved in collections. And keep in mind that convincing the court to get involved in forcing payment is only half the battle! A big part of the struggle of forcing a debtor to pay off debt is locating the debtor’s assets, such as identifying their bank or their car.

• Nonetheless, despite increasing the debtor’s chances of voluntarily paying off a judgment, payment plans also are risky. Why? Because even though they often make it easier for debtors to pay, sometimes debtors still don’t pay according to their payment plans. When this happens, a creditor would likely want the court to convert the payment plan back into a lump sum payment order so that the court can then approve collections of the entire amount rather than each and every missed payment under the payment plan. As already pointed out, getting the court to make this change can take a very long time!

• You should also consider that payment plans must be converted back to lump sums before the court can order the collection method known as a “lien,” which is a court order that gives someone who is owed money or property the right to the property of the person who owes them.

If it is unlikely that the debtor will willingly pay you the judgment amount, then it might make sense for you to oppose a payment plan, so that you can use the court-ordered collections process to get the money you’re owed from the debtor’s wages, bank account or sale of their property.

Debtors can often get the court to approve a payment plan when they can show the court that they would really be unable to pay the judgment in one lump sum. When considering this question, of whether the debtor really has the ability to pay a lump sum, the court will consider things like: the debtor’s resources to pay – i.e., its monthly income and the value of its property — on the one hand, and all the things that debtor needs to pay for in addition to the judgment, such as household expenses and other debts, on the other hand, to decide if the judgment amount can realistically be paid off all at once in a lump sum. Courts like payment plans when it’s obvious that a debtor won’t be able to pay a judgment all at once; after all, what’s the point of ordering someone to do something they are incapable of doing?

If the court has approved a payment plan, a creditor can only get the court to approve collections when the debtor has failed to make its payments on their due date. This means that the creditor can ONLY collect missed payments through court-ordered collections (such as through wage garnishment or bank levy, which were previously discussed) and not future payments. To get out of this bad situation and get paid more quickly, the creditor who is owed money may ask the court to cancel the payment plan and order the debtor to pay the judgment amount in a lump sum, just as the debtor would have had to do if the court never approved the payment plan. It could take months for the court to convert a payment plan back to a lump sum order, thus opening the door for court-ordered collection of the entire lump sum.

If you’re a creditor who thinks that a payment plan would cause you more harm than good, then you can try to get the court to refuse a payment plan — either during the initial small claims hearing (i.e., “trial”) or afterward.

At the initial small claims hearing, you can argue that you need more information about the debtor’s ability to pay a judgment (i.e., what assets they have) before deciding even if you should support or oppose a payment plan. More specifically, you can ask for: (1) the debtor to complete a Financial Statement (EJ-165) form (which has the debtor answer a lot of useful questions about what sorts of assets the debtor has, on the one hand, and what sorts of expenses and debts they have, on the other hand); (2) the opportunity to ask the debtor specific questions in writing (called “interrogatories”) regarding the debtor’s ability to pay (as allowed for by Sections 708.010 – 708.030 of the California Code of Civil Procedure); and (3) ask the court to order a debtor’s exam (as provided for by Sections 708.110 – 708.205 of the California Code of Civil Procedure) to get information that will help the creditor decide what sort of collections proceeding it should request the court to enforce against the debtor.

A debtor would have to file a Request to Make Payments form (SC-220), along with a Financial Statement form (EJ-165) with the court in order to get the court to formally approve a payment plan. After these forms are filed, the court will mail a copy of each of these filed forms to you, the creditor. You will have 10 days from the date the court mailed these forms to you to file your objection to the requested payment plan, via a Response to Request to Make Payments form (SC-221). To successfully oppose a payment plan, you must persuade the court that the debtor either 1) actually has the financial ability to pay off the entire judgment in a lump sum or 2) is unwilling to pay off the judgment through a payment plan, and as a result, the court-ordered collections process should be made quicker and easier for you by the court ordering payment in a lump sum (remember that a payment plan would make the court-ordered collections process much more difficult for you!)

1. Review the debtor’s Financial Statement (EJ-165). One way to succeed in fighting a payment plan is to show the court that the debtor really has a better ability to pay – i.e., a higher income and more assets, along with less debt and expenses — than they put down on the Financial Statement. How do you show that the debtor actually has a better ability to pay than reported? There are many ways to go about doing this. For instance, look at who the debtor put down as dependents. Dependents are other people someone is responsible for financially supporting. Consider whether the debtor is being truthful – i.e., whether the debtor truly has the responsibility of financially supporting these people. Maybe you have proof that someone listed as a dependent actually has their own high-paying job or is a married adult and is really supported by their spouse (as opposed to by the debtor)?Or, look at the debtor’s reported real estate. Maybe the debtor reported still owing a mortgage but you have evidence that the mortgage has already been paid off. Or maybe the debtor under-reported the value of their real estate and you can prove that the current market price of the real estate is much higher than reported.Also, point out anything the debtor left out of their Financial Statement. For example, you might have proof that the debtor, their spouse, or dependents have assets (such as cars, homes, or other things of significant value) that the debtor failed to put down.

2. While the Financial Statement provides an important reference point for you, do not focus only on the Financial Statement. Can you find out, for instance, whether the debtor has a spouse or financial sponsor who was not listed on the Financial Statement (for example, a life partner with a good job, wealthy parents, etc.)?

3. Focus on not just showing the debtor’s ability to pay but also on showing that the debtor is unwilling to pay!For example, look at how old the debts listed in the Financial Statement are. Did the debtor incur a bunch of new debts after you file your lawsuit (such as purchasing a new car or home on credit)? If that’s the case, these new debts might show that the debtor is trying to intentionally get out of paying you by trying to appear poor and unable to pay.Also, maybe you offered the debtor a conditional settlement agreement (see the next section for more information on conditional settlements) earlier that looks very similar to the payment plan the debtor requested, but the debtor refused your earlier settlement plan on the basis of not having enough money. If that’s the case, it might suggest that the debtor is not really asking for a payment plan because they intend to pay off the judgment in a more manageable way, but rather that they have no intention of paying and they just know that payment plans make court-ordered collections much more difficult.

4. Consider the debtor’s ability to borrow money to pay off the judgment. If the debtor’s credit score is excellent and debt is small, you might be able to argue that a payment plan should be rejected because the debtor could get a bank loan to pay a lump sum judgment all at once. Also, he might have a private pension fund account that he can borrow from to pay the judgment.

After a court issues a judgment and at any time before the judgment expires (in California, money judgments expire automatically after 10 years), you and the debtor can enter into a conditional settlement agreement establishing a payment plan yourselves. Under such an agreement, you can agree to take no action to collect on the judgment so long as the debtor makes payments on time. Why would you ever voluntarily offer a conditional settlement agreement? You would do so because it provides you with a great way to avoid the debtor getting a court-ordered payment plan that would make your efforts to get paid through court-ordered collections very difficult. Remember: if a court-ordered payment plan is in place, it is very difficult to get paid the entire sum once the debtor stops making voluntary payments because you would first have to get the court to cancel the payment plan and re-order a lump sum payment prior to getting the court to order collections for the entire amount. Under a conditional settlement, on the other hand, you can keep the option to get court-ordered collections for the lump sum in its entirety in your back pocket. If the debtor breaks the terms of your conditional settlement agreement by failing to make payments on time, you can seek court-ordered collections for the entire lump sum without having to get the court to cancel the payment plan.

Read More: I Can’t Collect Money from the Other Party on My Judgement