Don’t Panic and Follow These 5 Steps Instead

Let’s face it, if we’re not already in tough financial times now, it’s becoming more of a reality. The news tells stories of more layoffs, more folks (and businesses) not being able to pay rent, more businesses struggling, and those stimulus checks (although nice) not going very far. In this time, I predict that there will be some folks that struggle with keeping up with their debt. It might be the only logical choice – having to choose between making ends meet and paying your debt. If and when that happens, you may start hearing from your lenders, their collectors or even something worse – the threat or an actual lawsuit.

Consumers who have received a court summons for an outstanding debt must take immediate action and determine what options they have. A lawsuit summons isn’t something to take lightly and could lead to very negative outcomes if the consumer just ignores it, in fact ignoring it is probably the worst thing you could do. If if does happen to you – don’t panic and follow these 5 steps to work through it instead.

1. Respond to the Lawsuit

Responding to the lawsuit prevents the court from entering a default judgment against the consumer – which is obviously a no win for you. The standard turnaround is about 20 days, and if a default judgment is rendered, you’re essentially liable for the entire debt, no if’s buts or um’s about it. Unfortunately in the event of a lawsuit, I would recommend going the attorney route. Yes they can be pricey but it’s a different ballgame with courts and not one many of us are familiar with. So, speaking to a bankruptcy lawyer helps you determine the most effective way to respond to the summons. The attorney reviews the circumstances of the debt and determines if the debt collector has a viable claim against the consumer and determine how to handle the case in an attempt to achieve a more positive outcome.

2. Challenge the Lawsuit

Of course before blindly accepting the summons, it’s critical that you do your due diligence and make sure what they’re bringing you to court for is legit. If the balance is incorrect or was already paid off, you can challenge the lawsuit. It’s necessary to gather evidence for challenging the debt. If the debt was paid off, you’ll have receipts for their payment through your credit card or bank account. If the balance is incorrect, you’ll needs the last statement from the debt from the original creditor. Too often, creditors will sell the account to a collection agency to offset the loss of the debt. When this happens, the debt collection agency may inflate the total balance of the debt. You’re not required by law to pay any more than the true balance for the account. A collection agency cannot force you to pay any added fees or charges applied by the collection agency.

If you win their challenge, the debt collector must remove the debt from your credit history. Consumers can file a dispute with each of the credit bureaus to invalidate the debt. The credit bureaus will conduct an investigation if the credit doesn’t remove the debt. If the credit bureaus establish that the debt is no longer valid, it is removed from all three credit bureaus.

None of this is fun or necessarily easy, but definitely better compared to having to pay debt that you’re not responsible for!

3. Determine if the Statute of Limitations Has Passed

Reviewing state laws for debt collection practices determines if the debt has passed the statute of limitations. Typically state laws limit how long creditors have to file a lawsuit against a consumer. The statute begins when the account is closed. For example, personal loans are closed when the borrower defaults on the loan. Once the account is closed or charged off, the creditor has four years in the state of Texas (for example) to collect the balance through a lawsuit. If a debt collector threatens to file a lawsuit after the statute runs out, the consumer could file a motion against the debt collector for harassment.

4. Negotiate a Settlement Offer

Remember that a collector or lender’s main goal is to get their money back, with any interest owed them. They knew going into it that not all borrowers would be able to pay it back, that there’s always a bit of risk involved. So, if the debt is legit and the statute of limitations hasn’t passed, you can, and probably should attempt to negotiate the balance due. Settlement offers are typically around 50% less than the original debt. If the attorney can negotiate and get a settlement offer, the consumer could pay small payments and get the debt settled faster. The offers are either a lump sum amount that is far lower than the original balance or a new installment plan. After the settlement offer is secured, the debt collector cannot file a lawsuit against the consumer. Once the debt is paid in full, the debt collector removes the debt from the consumer’s credit history.

5. File for Bankruptcy

This is probably the ‘nuclear option’ and should only be viewed as a final step. Filing for bankruptcy gives you an automatic stay that prevents any creditors including debt collectors from filing a lawsuit against you. To qualify for bankruptcy, you must present income statements for the previous six months for a chapter 13 claim. You must have an income that is below the median income for their household size in their state.

The chapter 13 bankruptcy presents a new payment plan for settling the consumer’s debts. The cases can last between three and fives and provide a more affordable monthly payment based on the consumer’s income. However, the consumer is required to use their disposable income to pay off any debts that weren’t included in the bankruptcy. If the debt related to the lawsuit wasn’t included in the bankruptcy claim, the debt collector cannot file a lawsuit until after the bankruptcy is discharged.

If it is a credit card debt it is possible that the court will discharge the debt if it qualifies, and you will no longer be responsible for the debt as long as you follow the plan laid out in the bankruptcy case. If the debt isn’t discharged, you must pay it off before the end of their case.

For a chapter 7 bankruptcy claim, you must provide details about your income, assets, and debts. The court’s assessment must determine that the consumer cannot pay their debts with their income, but the consumer has enough assets to sell and settle their debts. Once the claim is approved, the court assigns a trustee to manage the sale of the assets seized for liquidation. The trustee collects the proceeds from each sale and distributes the funds to the creditors. Any exempted value is returned to you. However, I imagine if you got yourself into this mess that you may have attempted to do this before, and your assets may not be enough regardless.

Liquidation is an effective way to become debt-free if the consumer has enough assets to sell and settle all their debts. The cases take up to six months to complete, and the court can discharge debts just like in chapter 13. Any debts that aren’t paid off or discharged at the end of the claim are the your responsibility.

It is important to note that bankruptcy will stay on your record for many years and it could very negatively affect your ability to borrow money in the future, get a job, or even rent or buy a place to live!

Summary

Consumers who become the defendant in a lawsuit filed by a creditor or debt collector must take immediate action. There are several options for avoiding a judgment including challenging the debt, negotiating for a settlement offer, and filing for one of two chapters of bankruptcy. Reviewing all legal avenues helps consumers make sound decisions in these legal matters!

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