If you have won a judgment against someone who owes you money, you may wonder if you can charge interest on the amount owed. The answer is generally yes, but there are specific rules and regulations that you need to be aware of. We'll discuss the basics of interest on judgments and judgment debts, including how much interest you can charge, the legal requirements, and additional information on how it works.
Interest on judgment refers to the amount of money that accrues on the unpaid judgment amount over time. In other words, the interest is added to the original amount owed due to late payment. The interest rate can be determined by state law, court rules (small claims court, etc.), or the agreed terms between the parties involved. It's important to note that interest on judgment is separate from any costs or fees associated with the judgment.
The interest rate that can be charged on a judgment is usually determined by state law or court rules. The Federal Reserve System sets the maximum interest rate that can be charged on a judgment without a state or court-imposed limit. As of 2021, the federal judgment rate is 2.09% per year. However, some states have much higher rates, while others prohibit or limit the amount of interest that can be charged.
In addition to the interest rate, the calculated interest on judgments can also vary by state. Some states calculate interest on a daily rate, while others use an annual rate. The interest rate may also be compounded, meaning that interest accrues on the original amount owed and any previously accrued interest. In CA, 10% is entitled to a judgment which is not compounded.
Let's say you won a judgment for $5,000 against someone who owed you money. The judgment was entered on January 1, 2022, and the interest rate in your state is 3% per year. If interest accrues from the date the judgment was entered, you could charge the debtor $150 in interest each year until the debt is paid. If the debtor doesn't pay until January 1, 2024, the total amount owed would be $5,300 ($5,000 + $150 x 2).
If your state allows compounded interest, the interest would accrue on both the original amount owed and any previously accrued interest. So, if you charged compounded interest at a rate of 3% per year, the total amount owed on January 1, 2024, would be $5,596.02.
Once a judgment has been entered, it's important to work with the judgment debtor to receive payment. You may choose to offer payment terms, such as allowing the debtor to make installment payments over time. In this case, you can still charge interest on the outstanding balance if it complies with state law.
If the debtor fails to make payments on time, you may also be able to charge interest on late payments. This is typically called "default interest" and is a separate type from interest on the judgment. The amount of default interest that can be charged is usually specified in the contract or agreement between the parties involved.
It is generally possible to charge interest on a judgment or judgment debt, but the amount and legal requirements can vary by state. It's essential to check your state's laws and follow the proper procedures to ensure you can charge interest and receive payment for the judgments entered. By understanding the basics of interest on judgments and judgment debts, you can effectively manage your business or personal finances and protect your legal rights.