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What to do if you are being sued for debt

If you're being sued for debt, one of your creditors has filed a claim in court to secure a money judgment against you. If the creditor wins, the court may allow them to seize your assets or garnish your wages. However, you still have options even after a suit is filed.

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Settling the debt out of court

The fact that a creditor has filed a lawsuit doesn't mean you can't negotiate an out-of-court settlement. Once you receive notice of the suit, contact the plaintiff—usually one of your creditors—to try to work out a settlement to pay off debt in exchange for their dropping the suit.

An out-of-court settlement is a viable option when:

  • You're sure you owe the debt
  • You don't dispute the amount
  • You can afford to repay something less than the full amount owed

Debt litigation is expensive and time-consuming, so creditors are often willing to settle. If your debt negotiation is successful, make sure you put all the details of your settlement in writing before you pay. Also make sure the plaintiff files the agreement with the court so it becomes legally enforceable.

Should you go to court?

It's extremely important to appear for all the court dates in your case. If you fail to show up, the court can enter what is called a default judgment against you. This means the court automatically grants a judgment in the creditor's favor without hearing your side.

If the court issues a default judgment, it may simply award the amount the creditor is demanding without asking any questions. Note that the court will also issue a default judgment against you if you fail to respond to the creditor's complaint in time.

Responding to notice of a debt lawsuit

When you're served or presented with notice of the creditor's lawsuit against you, you typically have 20-30 days to file an answer, or a written response to the creditor's complaint or petition. You'll usually also have to pay a filing fee when you file your response.

If you choose to handle the matter yourself, your response must include all potential defenses to the plaintiff's claim. For example, you might include in your answer that the statute of limitations has expired or evidence that you already paid the debt.

"I think debtors can certainly handle these cases themselves if they have the proper information, and follow the proper steps, but in my experience having an attorney that handles these type of cases on a regular basis can actually end up saving you money in the long term."

Texas Bankruptcy Attorney Seth Parker Crosland

In your answer, you will need to respond to each of the plaintiff's statements with "admit," "deny," or "lack knowledge." For instance, if the plaintiff claims you owe $11,000 on a credit card with a number you don't recognize, you would respond "deny."

Defenses to a debt collection lawsuit

In your answer to a debt lawsuit, you'll include any affirmative defenses you have, which may include:

  • The debt is time-barred, meaning the statute of limitations is up. What the statute of limitations is will depend on your state. Generally, the creditor has 4-6 years after the date of the last payment you made on the debt. Once the statute expires, the creditor is barred from collecting on the debt.

  • Improper service of process, meaning you didn't receive the summons and complaint in the manner required by the rules of the court.

  • The contract obligating you to repay the debt is illegal.

  • A third party is legally responsible for paying the debt. For example, your insurance company might be responsible for a hospital bill.
  • The contract or the creditor violated a consumer protection statute, making the debt contract unenforceable.

The creditor's burden of proof

The creditor, or plaintiff, has the burden of proof in debt litigation. In other words, it's the creditor's job to prove that you owe the debt, not your job to prove that you don't.

Debt lawsuits are civil cases, which means the plaintiff must prove by a "preponderance of the evidence" that you owe the debt. That means the creditor must prove it's more likely than not that you owe the debt. You might be surprised how many creditors can't meet this burden.

In fact, a 2012 report in the New York Times estimates that 90 percent of debt lawsuits are flawed and can't prove that the defendant actually owes the debt. As proof, the creditor may offer documents such as the contract you signed, your cardholder or agreement, or your statements.

Understanding summary judgment

One possible outcome of being sued for debt is for the court to issue a summary judgment. Usually, in debt cases, the plaintiff files a motion for summary judgment.

If the plaintiff can show that there is no genuine dispute on any material fact, the plaintiff is entitled to summary judgment as a matter of law. In other words, the case doesn't need to go to a jury and can be decided by a judge due to an absence of disputed facts.

For example, the plaintiff may be able to show a judge that you signed a loan agreement, never made any payments, and have no defenses for not paying. If you don't dispute those facts, the judge can grant the plaintiff's motion for summary judgment.

What "judgment proof" means

The term "judgment proof" is a little misleading because creditors can still obtain money judgments against you. But when you're judgment proof, they can't collect on them. "Judgment proof" means that you don't have any income or assets a creditor can legally come after. In general, you're judgment proof if:

  • You are unemployed or earn little money
  • You don't own any assets, such as a home or a bank account with money
  • You have income that's exempt from seizure by judgment creditors, such as Social Security benefits, public assistance, or unemployment benefits.

The effect of declaring bankruptcy on pending debt litigation

Generally, declaring bankruptcy delays or halts debt litigation no matter how far along the suit is. Filing for bankruptcy puts what is called an automatic stay in place, barring creditors from collecting from you, including in court.

When your bankruptcy is complete, if the debt at issue in the lawsuit gets discharged, the creditor can no longer collect on it. In other words, the creditor will have to drop the suit.

Possible outcomes of debt suits

If you win your debt lawsuit, you won't have to repay the creditor. If you lose, creditors get a judgment against you, which usually entitles them to:

  • Garnish your wages
  • Place a lien against your property
  • Freeze all or part of the funds in your bank account

Being sued for debt can be a stressful experience, especially if you don't know your rights and options as a debtor. Now, you have the fundamentals necessary to choose the right defense strategy.

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