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The Most Important Things to Know If You Get Sued by a Creditor

Getting sued by a creditor starts a very fast-ticking time bomb. You should and you CAN prevent this bomb from going off.

 

A Lawsuit Should Catch Your Attention AND Spur You to Action

For certain economic reasons, most conventional creditors don’t sue you as quickly as they legally could. That means that if you are getting sued you are very likely in some significant financial trouble. Even if you feel like there is nothing you can do, there almost always is, and you owe it to yourself to treat it as a wake-up call. You will feel better if you are proactive and at the very least understand your options, instead of just avoid the situation out of understandable fear or embarrassment.

Most debts that people get behind on are at some point—often quite quickly—assigned by the original creditors to collection agencies. This can happen two ways. Either the creditor still owns the rights to the debt and the collection agency simply gets a percentage of what it collects, or the creditor sells all of its rights to the debt to a collection agency and then is legally no longer in the picture.

Either way, the collection agency then tries to get you to pay the debt. In most situations it is reluctant to sue you—at least at first—because a lawsuit costs it money that it doesn’t know if it will ever recoup from you. Instead—again at least at first—it will tend to aggressively contact you and try to make you pay whatever it can. Depending on the facts of the situation—including whether you have a job or real estate or other assets—the collection agency will then decide whether it’s worth suing you. If you ARE sued, there’s a good chance that the collection agency believes it can force payment from you by garnishing your paycheck or bank account, or by putting a lien on your home or by attaching other assets. Once you are sued, the collector has upped the ante and is signaling that it believes investing in a lawsuit is worthwhile to it.

This is a signal you need to pay attention to right away.

The Game Collectors Play

Collection agencies act out of their own self-interest. They don’t generally sue you without doing a cost-benefit analysis: they don’t invest the cost of a lawsuit without thinking that the odds are good that they’ll get a decent return on that investment—getting those costs repaid and the debt as well. After all, a collection agency that wastes too much of its money on lawsuits that don’t pay off won’t be in business long.

So if you’re sued, most likely the collector has its eyes on one or more potential ways it expects to force you to pay—such as a paycheck to garnish, or some real estate to put a lien on (to foreclose on or get paid when you sell or refinance). Even if you are not working now, your prior work history may make you a decent target. The collector has decided it would benefit from forcing you to pay the debt by court order and enforcement—through garnishment, forcing you to appear for a judgment debtor examination, placing a judgment lien on your real estate, and such.

In fact the collection agency is banking on you not taking the lawsuit seriously enough. The sad truth is that a large majority of the time people don’t respond to lawsuits so that judgments are entered against them by default. The collector is hoping to get a judgment against you, and then to use the force of law to start grabbing your income and your assets.

How to Beat Collectors at This Game

Don’t assume that there is nothing you can do. Don’t take the seemingly common sense but wrong approach that you owe them the money and so you have to take whatever they dish out. Find out what they can and can’t do to you, and how you can protect yourself. And do that before the time expires and the creditor or collection agency gets its judgment against you.

Don’t let your creditors take advantage of you and your lack of knowledge.  Most consumer or bankruptcy attorneys will give you a free consultation with honest advice about your options. Learn what’s best for you in light of your own personal goals and hopes. You can and ought to have a proactive game plan.

Timing is Absolutely Crucial

When you find out you’ve been sued, there is very little time to respond. If you don’t in time, you lose the lawsuit “by default.”

The judgment that results is much more than simply an admission that you owe the debt. The formal complaint in most creditor lawsuits consist of a statement that you owe a debt, and now owe the full balance, plus the interest accrued so far and into the future, plus whatever attorney fees and other costs paid by the creditor/collector to sue you.

Letting a default judgment be entered against you makes you forever legally liable based on whatever allegations the creditor put into its complaint, even if inaccurate or not supported by your contract or by the law.

The complaint may include admissions that can be even more dangerous, for example, that you incurred the debt through fraud, potentially making the debt not dischargeable even in bankruptcy.

Reasons to Not Allow a Default Judgment

Quickly see an attorney as soon as you are sued because:

a) You should understand the consequences of the lawsuit, and your options for dealing with it. Know what your options are instead of assuming you have none.

b) You may have defenses so that you don’t legally owe the debt after all. Collection agencies routinely try to collect debts on which the statute of limitations has expired. They can sue the wrong person. They may include allegations which are not accurate or supported by law.

c) You may have a counterclaim—an argument that the creditor acted illegally in some way and actually owes you money for damages. At the least this could give you leverage to settle the debt under much better terms.

d) Once the time to respond expires and a judgment is entered, it is too late to deny the allegations in the complaint.   

e) By having an attorney review the lawsuit and your overall debt picture, and discuss your options, you may end up solving deeper problems. Most consumers do not have an attorney who they talk with regularly. So problems accumulate. You don’t have a chance to ask questions when they arise. This often leads to lots of confusion and anxiety. Seeing an attorney about a pending lawsuit could lead to addressing how to improve your entire financial life.  

 

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Don’t Let a Creditor Get a Judgment Preventing its Debt from Being Written Off in Bankruptcy

Some creditor judgments are very dangerous since the prevent you from writing off the debt later in bankruptcy. Try to avoid judgments.

 

Consequences of Allowing a Judgment

In recent blog posts we’ve written about the most direct reason to avoid letting a creditor which has sued you get a judgment against you–it gives the creditor powerful ways to make you pay the debt, such as by garnishing your paychecks or bank accounts. Also, if you own any real estate, including your home, a judgment usually creates a lien on your real estate, another way to force you to pay the debt.

But there’s another reason we mentioned earlier–you should avoid a judgment whenever possible because it can result in that debt not being written off (“discharged”) when you file bankruptcy. Or even if that debt can be discharged, it may become much more difficult to do so. This blog post is about these kinds of judgments.

How a Judgment Can Affect Whether a Debt Can Later Be Discharged

So how can a judgment turn a debt that could have been discharged into one that can’t, or is much harder to discharge?

A very basic principle of law states that once one court has decided an issue, other courts must respect that decision. The idea is that litigants should be able to use court resources only once to resolve a specific dispute. Once a court decides an issue, the losing party shouldn’t be able to hunt around for another court to hear and decide the same dispute (except for appeals to a higher court).

The original court—usually a state court—could potentially resolve a lawsuit in a way that would later makes the debt not dischargeable under bankruptcy law. A creditor could allege that the person owing the debt incurred it in some fraudulent or inappropriate way. If the lawsuit is resolved with the judgment reflecting that that’s what happened, then later when the debtor files bankruptcy the bankruptcy court would likely be bound by that decision by the original court. The judgment having been previously entered by the original court, the debtor would not have an opportunity to challenge its conclusions after filing bankruptcy.

Many Judgments Do NOT Cause Discharge Problems

Most creditor lawsuits are about only one thing: whether the debt is legally owed. So the judgments arising from such lawsuits usually establish nothing more than that the debt is a valid debt, at a certain amount, plus certain fees and interest. Such judgments, which don’t make any determination about a debtor’s fraudulent or otherwise inappropriate behavior, do not impact the discharge of the underlying debt in a subsequent bankruptcy.

It’s Safer to File Bankruptcy Before a Judgment is Entered

The problem is that it’s not always clear what exactly the initial lawsuit decided in its judgment, and thus whether the judgment makes the debt not dischargeable or at least harder to discharge. Specifically, the language of the judgment may not mesh exactly with the bankruptcy laws about fraudulent debts, which makes difficult to determine whether that issue is still open for determination by the bankruptcy court.

A related question is whether the matter was “actually litigated” if the person against whom the judgment was entered did not appear to defend the lawsuit or did not have an attorney.  In other words you may or may not be able to get your day in bankruptcy court depending on whether in the eyes of the law you really already had your day in the prior court.  

To avoid these kinds of ambiguities, and to avoid the risk of losing your chance to defend your case in bankruptcy court, don’t wait until after a judgment has been entered against you to see a bankruptcy attorney. This is especially critical if a lawsuit’s allegations against you refer to any inappropriate behavior other than not repaying the debt.

The bottom line is that if you get sued by any creditor you should quickly see an attorney, even if you don’t plan on fighting the lawsuit. Getting to an attorney quickly enables you to learn if the lawsuit could lead to a judgment making the debt not dischargeable, or more difficult to discharge, in bankruptcy. If so, you would then have the option of filing the bankruptcy to prevent such a harmful judgment from being entered, instead of being stuck with it if you file a bankruptcy later.

 

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Why You Should Not Allow a Creditor to Get a Default Judgment against You

Not responding to a lawsuit by a creditor can harm you in more ways than you think.

 

Three Different Sets of Reasons

Judgments can harm you in three distinct ways:

1) Give the creditor powerful collection tools against you to collect the debt.

2) Force you into filing bankruptcy when it’s not to your best advantage.

3) Makes it harder sometimes to discharge (write off) the debt later in bankruptcy.  

Today’s blog addresses the first one of these. The other two will be covered in my next blogs.

The Temptation to Let a Lawsuit Turn into a Default Judgment

Most lawsuits filed by creditors and collection agencies to collect debts result in judgments against the people being sued. That’s because the main allegations in most of these lawsuits simple argue that the debt at issue is legally owed. And that’s usually not in dispute. So the people being sued understandably figure that there’s no point in responding to allegations that appear to be true.

Practically speaking, most of the time the people being sued are at the end of their financial rope. So they believe that they can’t afford to hire an attorney to find out what their options are, or the consequences of doing nothing.

What ARE the Consequences of Doing Nothing?

You may know that a judgment gives a creditor the right to garnish your wages and bank accounts. You may believe that you can prevent such garnishments from happening to you by keeping your money out of bank accounts and by being paid other than a regular wage or salary (although even those are not practical options for most people).  Perhaps, but the “judgment creditor” usually has other rights against you once it gets that judgment.

The laws differ state by state, but generally a judgment becomes a lien against any real estate you own, or will own in the future. Depending on the facts and applicable law, the creditor may then be able to foreclose on that real estate to get its debt paid. Think about not only property under only your own name, but also your rights to property held jointly with a spouse, parent, or through a trust or estate.

An aggressive creditor usually has other tools available. In most states it can get a judge to order you to go to court to answer questions under oath about what you own so that the creditor can find out what it can take from you. The creditor may be able to get a court order sending a sheriff’s deputy to your home or business to seize some of your possessions for payment of the debt. If someone owes you any money (or anything else), that person can be ordered to pay that debt to the creditor instead of to you.

Similarly, if you own a business, the creditor can force your customers to pay it instead of you. This can be devastating both to your cash flow and to your business reputation. Your business could even be subjected to a “till tap”: a sheriff’s deputy arriving at your place of business to take money directly out of the cash register to pay towards the judgment debt.

Will These Happen to You?

We don’t want to give the impression that these kinds of aggressive collection procedures are used in most cases, or will necessarily be used in yours. Some of these are unusual, taking a fair amount of extra work and fees for the creditor or its attorney, and so likely won’t happen in most simple collection cases. The point is that once creditors have a judgment against you, they have many powerful options against you. We meet all the time with distressed new clients who have been shocked at how creditors with judgments against them have been able to financially hurt them.

Why See an Attorney If You Have No Defense to the Debt?

Flying blind is scary and dangerous. Getting sued and not knowing the potential consequences of just letting the creditor win is like flying blind. Besides potentially finding out about possible defenses to the lawsuit, consulting an attorney gives you the opportunity to consider your broader financial situation, and your options for addressing it. A lawsuit by a creditor is usually a symptom of a broader problem. By consulting with a knowledgeable attorney, you may learn about potential solutions to both the lawsuit AND the rest of your financial problems.

 

Please visit our website again for the next two blogs about the other very important reasons why you should not allow a creditor to take a default judgment against you. 

 

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