Help! I’ve Just Been Sued by a Creditor! What Do I Do Now?

Posted by Kevin on March 31, 2016 under Bankruptcy Blog | Be the First to Comment

Don’t react to getting lawsuit papers by avoiding them. React by helping yourself.  Get some competent legal advice about what this lawsuit really means, whether and how it can hurt you, and what you likely can do about it.

Lawsuits by most creditors aren’t “personal.” They’re just a business decision. The lawsuit papers you have in your hands tell you that the creditor has decided that suing you is a good bet.  It thinks that the lawsuit will help get the debt paid. The creditor likely even has in mind specifically how it expects to get paid.  It may well be targeting your bank account, your paycheck, your home, or some other income or asset.

The creditor is also making another easy bet—that in fact you won’t do anything about the lawsuit papers after getting them. At least not in time to prevent the lawsuit from turning into a judgment against you.  Most people don’t.

So the creditor is banking on you letting them get a “default judgment,” a court decision in favor of the creditor which happens automatically (or at least without a trial)  if you do not formally reply to the lawsuit on time.

Once armed with a judgment,  the creditor to start grabbing your money and your assets, through orders of the court, sometimes in ways you might not expect.

A Judgment against You is More than Just an Admission that You Owe the Debt

But even if the judgment does not result in giving a creditor a way to get money out of your right away, it has longer-term consequences.  For one,  judgments can be reported to credit agencies.  Affects your FICO score and, therefore, your ability down the line to get credit.   In addition, once the deadline to respond passes and a judgment is entered, you’ve give up on some important rights:

a) Your right to raise possible defenses. Creditors and collection agencies can be shockingly cavalier about whether the debts they are pursuing are legally valid. Think about it: since in the vast majority of the time consumers don’t respond to lawsuits and judgments are rubber stamped, there’s not much incentive for the creditors to get their paperwork right. You need to have an attorney review the lawsuit to find out if the statute of limitations on the debt has expired, or if you have any other defenses.  After the judgment is entered against you, it is extremely difficult, and a lot more expensive,  to raise any such defenses.

b) Your right to raise counterclaims. A counterclaim is your argument that the creditor did something wrong—in the way the debt was created or in how it was collected. Counterclaims say that you have been legally damaged, entitling you to compensation. A default judgment against you either waives your right to bring a counterclaim, or takes away the counterclaim’s leverage when it would do you the most good.

c) Your right to dispute facts. The debt could become more difficult to write off in bankruptcy after a judgment is entered, if certain facts are alleged in the lawsuit (and deemed admitted by your lack of a response).  This could put you at a serious disadvantage if you ever need to file bankruptcy.

That is not to say that you cannot, within a set period of time, come into court to set aside the default judgment and then raise those defenses. But, in NJ at least, you must file a motion and appear in court, and a judge makes the call.  It is difficult to do and expensive as opposed to filing your answer on time and putting forth your defenses as a matter of right.

If you do get sued, do not bury your head in the sand.  Consult and attorney.