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The Insider's Guide to Surviving a Creditor Lawsuit

Updated on
March 16, 2024

Getting Sued By a Creditor? Don't Panic, You Have Options

Being served with a lawsuit from a creditor or debt collector can feel scary and overwhelming. Your first instinct may be to panic. But it's important to stay calm. You have rights and options.

The first thing to know is...

that creditors and collectors do not take legal action against every person who falls behind on payments. Lawsuits are usually a last resort after failed attempts at contacting you. However, if a creditor does take legal action, you need to respond appropriately.

When you are served with a summons, that means the creditor has filed a lawsuit against you in civil court to collect the debt. The summons outlines the complaint against you and provides a timeframe which you must respond by, usually 20-30 days. The summons will also include details on when and where to appear in court.

If you fail to respond within the designated time period, the court will likely issue a default judgment against you. This means the creditor automatically wins, and can then pursue methods like wage garnishment to collect what they are owed. So it's critical you take action to avoid a negative ruling against you.

While getting sued can be stressful, try not to let anxiety overcome you. Now is the time to educate yourself on the options available to resolve the situation in the most favorable way possible. Don't ignore the problem, but don't concede either. With the right help and strategy, you can get through this.

Responding to a Creditor Lawsuit

If you've been served with a summons for a debt collection lawsuit, it is absolutely critical that you respond within the required timeframe, usually 20-30 days. The summons will specify the exact date by which you must respond.

Failing to respond in time can result in a default judgment against you, where the court automatically rules in favor of the plaintiff (the creditor or debt collector) without hearing your side. This gives them the legal right to garnish your wages, levy your bank account, put liens on your property, and damage your credit.

Once a default judgment is entered against you, it becomes exponentially harder to fight back. Your options get very limited. That's why it's so important to calendar the response date as soon as you receive the summons and make sure you take action by that deadline.

When responding to a creditor lawsuit, you have three options:

  1. Negotiate a settlement agreement with the creditor or debt collector before the deadline. This may remove the lawsuit if you can agree on reduced payment terms.
  2. File an answer with the court denying responsibility for the debt and raising any defenses. Be sure to send a copy to the plaintiff.
  3. Request a jury trial if damages exceed $20. You'll have to appear in court and prove the debt is invalid.

Consulting with a lawyer to understand your rights is highly recommended. But whatever you do, don't miss that response deadline or you'll seriously limit your options down the road. Respond on time to avoid ending up with a damaging judgment against you.

Negotiating a Settlement

Getting served with a lawsuit can be scary, but it also presents an opportunity to negotiate and settle your debt. Before deciding to fight the lawsuit in court, consider reaching out to the creditor or collection agency to discuss a settlement. This can save you time, money, and stress compared to a prolonged legal battle.

When negotiating, don't admit liability for the debt.

Simply express that you want to resolve the issue. Ask if they will agree to settle for less than the full amount owed. Creditors often accept discounted lump sum settlements to avoid the costs and uncertainty of litigation.

Come prepared with a reasonable commercial debt settlement offer based on your financial situation. For recent debts you may pay up to 70% of the balance, but for older statute of limitations debts offer closer to 25-50% as a settlement. Explain how much you can afford to pay in a lump sum right away or via a monthly payment plan.

Get any settlement agreement in writing before making payments. The document should state the original debt balance, settlement amount, and that the debt will be considered "paid in full" once you pay the settlement amount. This prevents the creditor from coming after you for the rest later.

If the creditor won't negotiate directly, contact a consumer lawyer or reputable credit counseling agency for help. They can negotiate on your behalf to get old debts reduced or sometimes eliminated. Don't fall for debt settlement scams promising to eliminate your debt.

Approach negotiations in good faith, but don't let creditors intimidate you into accepting unreasonable settlement terms or payment plans you can't afford. Negotiating can provide a faster, cheaper resolution than fighting in court. But if talks break down, fighting an invalid debt may be your best option.

Fighting Back Against Invalid Debts

If you believe the debt is inaccurate, invalid, or too old to be legally collected on, you may have grounds to fight back against the creditor lawsuit. Here are some key strategies:

Request Debt Validation

Under the Fair Debt Collection Practices Act (FDCPA), you have the right to request debt validation from the collector. They must provide proof that you owe the specific debt amount they are claiming. If they can't validate it, the case may get dismissed. Send your request via certified mail and give them 30 days to respond.

Check the Statute of Limitations

Each state has statutes of limitations on how long creditors can legally pursue you for debts. For example, in California it's 4 years for credit cards. If the debt is past that time period, you can file to dismiss on time-barred grounds. The collector violated the statute of limitations by suing.

Prove You Don't Owe It

If the debt belongs to an ex-spouse, sibling, or the collector has the wrong person, gather evidence showing you are not the actual debtor. Include documents with your correct personal details demonstrating ID theft or mistaken identity. Present this to the collector and court to fight the improper lawsuit.

Claim Identity Theft

If the debts were opened fraudulently using your Social Security number, file an identity theft report with the FTC and police. Provide the ID theft report to the creditor and credit bureaus. This requires the collector to stop reporting the debt and may get the lawsuit dismissed.

The key is acting swiftly to gather evidence and file a response to the lawsuit by the date on the summons. With the right documentation, you can successfully fight invalid debts rather than letting collectors win by default. Consult a lawyer to ensure you have a solid case based on the statute of limitations, identity theft, or not owing the specific debt.

Protecting Your Assets if Sued by a Creditor

If you lose a creditor lawsuit, the court can authorize garnishment of your wages or seizure of your assets to pay the debt. However, federal and state laws protect certain assets from being taken. Knowing which assets are exempt is crucial for protecting your livelihood if sued by a creditor.

Some assets that may be exempt from garnishment include:

  • Homestead exemption: Your primary residence is protected up to a certain value that varies by state. In Florida it's unlimited, while in California it's $75,000.
  • Vehicle exemption: You can keep one or more vehicles up to a certain value. For example, in Texas the exemption is $5,000 per vehicle.  
  • Retirement accounts: Most 401(k)s, IRAs, and pensions are protected from creditors. The exception is if you withdraw funds, they could be seized.
  • Life insurance and annuities: Creditors cannot take the cash value built up in most life insurance and annuity policies.
  • Disability benefits: Payments you receive from disability policies are generally exempt.
  • Workers compensation: Benefits you receive for an injury sustained on the job cannot be garnished.
  • Child support: Alimony and child support cannot be seized by creditors.

In addition, federal law limits wage garnishment to 25% of your disposable earnings or the amount that exceeds 30 times the minimum wage, whichever is less. Your bank account is also protected from garnishment if it contains protected government benefits.

Consult an attorney to find out which assets are exempt in your state and how much protection you have. Careful planning of your assets and income can prevent creditors from seizing funds needed for your living expenses.

Seeking Legal Help

When you are served with a creditor lawsuit, one of the first questions that arises is whether you need to hire an attorney. Here are some key considerations on when it makes sense to bring in legal help:

Should you hire an attorney?

  • If the amount you owe is significant (e.g. more than $10,000), an attorney may be able to save you more money than their fees through negotiating a lower settlement or identifying violations.
  • If you believe there are errors or lack of documentation of the debt, an attorney can request proof and potentially get the case dismissed if none is provided.
  • If you have complex finances like trusts, business interests, or specialty assets, an attorney can help protect those funds.
  • If you are low income, you may qualify for free or low cost legal aid from organizations like Legal Services Corporation.
  • If the creditor has already won a judgement against you, an attorney may be needed to identify any appeal options or negotiations left.
  • If you are facing threats, harassment, or abusive collection practices, an attorney can help you take action under consumer protection laws.

When can you handle it yourself?

  • For smaller debts under $5,000-$10,000, you may be able to negotiate directly yourself.
  • If you have a clear defense like identity theft or mistaken identity, you may be able to get the case dismissed yourself.
  • If you have very few assets at risk, the cost of an attorney may not be worth it if you lose.
  • For simple finances like bank accounts and wages, you can identify exempt assets on your own more easily.
  • If you want to take a collaborative approach, you may be able to work out a payment plan yourself without legal action.

So evaluate the specifics of your situation, but recognize that a good attorney can be well worth the investment if you have significant debt or assets at stake. Don't be afraid to ask them for a consultation to assess your options.

Dealing with Wage Garnishment

If you lose a lawsuit filed by a creditor, one of the most common ways they can collect the judgment is by garnishing your wages. This means they can legally require your employer to withhold a certain amount of your paycheck and send it to the creditor to pay off your debt.

The amount that can be garnished depends on state law. Federal law also protects some of your earnings from being garnished if you meet certain income limits.

In general, creditors can garnish up to 25% of your disposable earnings, which is the net amount after taxes and deductions. However, if you are supporting a spouse or dependent child, they can only garnish 15% or less.

You will receive notice from your employer if wage garnishment is ordered by the court. The notice will specify the amount to be withheld from each paycheck. Your employer is legally required to comply with the garnishment order.

If too much is being withheld, you may be able to challenge the garnishment in court, especially if it would cause significant financial hardship. You can also attempt to negotiate an altered payment plan with the creditor to reduce the garnishment amount.

Having your wages garnished can be stressful. But being proactive about negotiating affordable payments can help minimize the impact. Consulting an attorney or credit counselor are also options if the garnishment would truly be unmanageable based on your unique financial situation.

Removing Judgments From Credit Reports

Getting a judgment removed from your credit report after it's been settled or paid can greatly help improve your credit score. Here are some steps you can take:

  • Request that the creditor "vacate" the judgment: Once a debt is paid or settled, ask the creditor to file a "satisfaction of judgment" document with the court, which officially vacates the judgment. Provide proof of payment.
  • Ask the court to vacate the judgment: Even if the creditor won't cooperate, you can petition the court to vacate the judgment, especially if you have evidence the debt is paid or settled. Submit a request or motion to vacate.
  • Send dispute letters to credit bureaus: Contact Equifax, Experian and TransUnion, provide evidence the judgment is paid, and request they remove it from your credit report. Follow up and appeal if necessary.
  • Hire a credit repair company: For a fee, credit repair companies can help manage the credit report dispute process to ensure the judgment is removed. Look for companies with a track record of removing collections and judgments.
  • Wait for it to automatically expire: Unpaid judgments typically drop off credit reports after 7 years. Paid judgments may drop off sooner. Don't renew the judgment's clock by making payments after it has been vacated or settled.

Getting a vacated judgment fully deleted from your credit reports requires persistence and meticulous record keeping. But removing derogatory items can significantly boost your credit score over time.

Bankruptcy: When It Makes Sense  

When sued for a debt, declaring bankruptcy either voluntary or involuntary may seem like a good option to make the lawsuit disappear. However, bankruptcy comes with long-term consequences that can make your financial situation even more difficult. Before deciding if bankruptcy is right for you when facing a creditor lawsuit, consider the pros and cons:

Pros of Bankruptcy

  • The Automatic Stay immediately stops any collection lawsuits and garnishments against you when you file. Creditors cannot continue legal action to collect on debts.
  • Most unsecured debts like credit cards, medical bills, and personal loans can be discharged in bankruptcy. This eliminates much of the debt you're being sued for.
  • Bankruptcy exemptions allow you to keep certain assets like your home, car, retirement funds, and a portion of equity. Creditors cannot seize exempt assets.

Cons of Bankruptcy

  • Bankruptcy stays on your credit report for 7-10 years and can significantly hurt your credit score, making it difficult to qualify for loans or credit cards.
  • You may have to forfeit non-exempt property and assets to repay creditors. Luxury items like boats, jewelry, and second homes may be liquidated.
  • Certain debts like child support, alimony, student loans, and recent taxes cannot be discharged through bankruptcy. You're still liable for these.
  • Bankruptcy filings require extensive documentation and court proceedings. The legal costs add up, with attorney and filing fees averaging $1,500 or more.
  • Future wages can be garnished up to 25% for several years to repay debts that are not discharged.

While bankruptcy stops lawsuits in their tracks, the long-term costs often outweigh the benefits for many people. Seek debt relief alternatives like credit counseling first. Consult an attorney to understand if bankruptcy is the right choice in your specific situation when facing a creditor lawsuit.

Suing Abusive Debt Collectors

If you are facing harassment or illegal practices from a debt collector, you may be able to take legal action against them. The Fair Debt Collection Practices Act (FDCPA) protects consumers from abusive and deceptive collection practices.

Under the FDCPA, you can sue a debt collector in court for damages if they engage in illegal practices like:

  • Using threats of violence or arrest
  • Publishing lists of debtors (shaming)
  • Calling you repeatedly in a harassing manner
  • Contacting you at inconvenient times or places
  • Misrepresenting the amount you owe
  • Falsely threatening garnishment or legal action
  • Contacting your employer about the debt

If you have evidence of abusive or illegal debt collection practices, you can sue the collector for damages. The FDCPA allows you to recover up to $1,000 in statutory damages, plus any actual damages such as emotional distress. The debt collector may also have to pay your legal fees.

It's advisable to consult with a consumer protection attorney to discuss the situation and weigh your options. They can evaluate your case and determine if you have grounds to sue under the FDCPA or related consumer protection laws. Suing an abusive debt collector sends a message that illegal harassment won't be tolerated.

Cain & Daniels

Every year, small businesses across the country are burdened by costly lawsuits and debt collection expenses, draining their hard-earned profits. Break free from the statistics and take control of your financial future with Cain and Daniels by your side. Our expert team will work tirelessly to negotiate with your creditors, ensuring that you can avoid expensive court battles and set up a manageable payment plan. Say goodbye to stress and hello to sustainable growth for your business – it's as simple as that.

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