The average American with a debt balance devotes 33% of their income to paying it down each month. Losing so much of your earnings to debt severely inhibits your ability to save money and increases the chance that you’ll be unable to keep up with your bills. It’s easy for something to slip through the cracks, especially if a financial emergency comes along and you aren’t prepared for it. If that something is a debt payment, you may eventually get sued by a debt collector.
Facing a lawsuit can be terrifying, especially when you haven’t prepared for it. It’s important to stay calm because depending on how well you react to the news, you can end up paying either a lot more or a lot less than you originally owed. Here’s a guide that will help you put the odds in your favor
Don’t Be Surprised: Creditors Will Sue You
The casual way that Americans sling lawsuits around has become a bit of a running gag.
The idea is so widely accepted that it’s become entrenched in our pop culture. Jean-Ralphio Saperstein from Parks and Rec makes a hilariously lucrative living by staging minor car accidents and winning the subsequent lawsuit.
Disclaimer: I’m not recommending this. Please don’t sue me.
Despite this, the natural human instinct is to think: “It won’t happen to me.” In psychology, this phenomenon is known as the optimism bias. One classic example is that everyone thinks they’re a great driver, yet crashes are still a leading cause of death.
🤔 In one interesting survey, 73% of respondents claimed to be great drivers. 93% of them simultaneously admitted to consistently exhibiting several risky behaviors while on the road.
That optimism might help reduce anxiety in the short term, but it can also prevent you from preparing for legitimate dangers. About 15% of Americans have reported being sued by a debt collector. 28% of Americans have a debt in collections. Don’t think that just because your account is a relatively small balance that they won’t come after you.
⚠️ Debt collectors routinely sue for balances that are well below $5,000.
How Creditor Lawsuits Happen
The collection process is a slow escalation that takes several months to complete. The sooner you take action to address the problem, the better off you’ll be.
Lawsuits are the final culmination of that process. Here’s how it usually goes:
- Your creditor notifies you that your account is delinquent and requests that you pay. After 30 days or so, they’ll report your late status to the credit bureaus, which will damage your credit.
- You’ll receive consistent requests to pay your debt over the next few months. If you still don’t pay, creditors will eventually mark your account as being in default. That usually happens after 180 days, at which point you’ll receive a final notice.
- The creditor can then choose to sue you or engage a debt collector to take over the process. They may hire the collector to come after you or sell your debt to them, usually for a small percentage of what you owe.
- Once a debt collector takes over, you’ll receive a lot more pressure to pay. They’ll track you down and may bombard you with phone calls and emails. You’ll receive a validation letter from the debt collector soon after they first make contact (within five days, by law) that verifies their identity and the details of the debt.
- If you don’t respond to their full-court press, the debt collector may eventually resort to a lawsuit.
You can avoid a lawsuit at any point in this sequence. Both original creditors and collection agencies are often willing to negotiate payment plans or even settle a debt for less than what you owe. They won’t offer these methods. You will have to take the initiative, contact the creditor, and negotiate. If you don’t feel able to do that, consider credit counseling, which can help you assess your options.
If you don’t take action, there’s a good chance that you will eventually face a lawsuit.
What Happens When You are Sued by a Debt Collector
A creditor lawsuit follows a predictable pattern. Knowing that pattern will give you an idea of what to expect and how to prepare.
- The creditor or collection agency will file a complaint with the court, explaining their case and what they want from you.
- The plaintiff is required to present or “serve” a copy of the complaint to you. They may do this themselves or hire a process server or sheriff to do it.
- You will have a fixed period of time to file a written response.
- A hearing will be scheduled. You willed receive a summons with the details.
- Depending on the outcome, the judge may issue a ruling or require further hearings.
☝️ When a summons arrives you may feel like the situation is completely out of control, but that is not the case. If you take the situation seriously and act immediately you can mitigate the damage. You may even be able to get the case dismissed.
What You Can (and Must) Do
The first step in fighting a creditor lawsuit is to take it seriously. This problem will not go away, and ignoring it will only make it worse.
1. Get Help
If you’ve been sued by a debt collector, you will need legal help. Hiring a lawyer can be expensive, but there are ways to get low-cost or free legal assistance. Look for free legal clinics run by local law schools, or look for legal aid societies or pro bono lawyers.
A lawyer can help you draft a response, advise you on the most effective defenses, and represent you in court. Finding a lawyer you can afford may take some effort, but having a lawyer on your side will dramatically increase your chances of success. 53% of respondents with legal representation won their debt collection cases, compared to only 19% of those who had no lawyer.
2. Double-Check That You Have a Duty to Pay
Debts are often sold from collector to collector, and records easily get mixed up. Some people are sued over debts they never incurred. Sometimes a collector will try to resurrect a “zombie debt” even if the statute of limitations has expired. Before you start preparing a defense, you have to verify that the debt is yours and that you really need to pay it.
- If the debt doesn’t belong to you, then you don’t have a duty to pay (though you should check that someone hasn’t stolen your identity).
- Your state’s statute of limitations may have expired. If it has, the debt is “time-barred” and the debt collector has no right to come after the account.
- If the original debt contract is unenforceable, or you canceled it during the legal window, you can avoid paying.
Any of these conditions is sufficient to request dismissal. If none of these conditions applies, you will still have options.
New regulations that came into effect on November 30, 2021 state that “A debt collector must not bring or threaten to bring a legal action against a consumer to collect a time-barred debt.” That means a debt collector can no longer sue you or threaten a suit if the statute of limitations on the debt has expired. Learn more about Regulation F and its impact on debt collection.
When you receive the complaint, you’ll be given a period of time to file a response. Always file something. This is where a lawyer or legal clinic can be of real help. Getting professional advice will help you draft an effective response.
4. Show Up to Your Court Date
The worst mistake you can make is to ignore the court summons. Failing to pay your debt is a civil offense and only punishable monetarily. Failing to appear on your court date or comply with a court order can lead to a warrant for your arrest for contempt of court. Yes, you can go to jail for debt.
Many collection agencies file dozens of suits at a time and count on most of the debtors not showing up to win the case. Over 70% of debtors fail to appear, in which case the judge will almost always award a summary judgment in favor of the debt collector, often without verifying the details of the debt.
Because so many debtors fail to show up and defend themselves, debt collectors often fail to prepare to prosecute their cases. They may simply assume that you will not appear and they will get a default judgment. If you are sued by a debt collector, simply showing up and demanding proof that you owe the debt can be enough to get a case dismissed.
What Happens If You Lose the Lawsuit?
As long as you show up to your court dates, you won’t face jail time for losing your lawsuit. You will have to start making payments on your debt, though.
With a court order, creditors can come after your income and your assets. For example, they may:
- Garnish your wages and take a percentage of your paycheck until the debt is gone
- Place liens on your assets which will prevent you from selling them or using them for collateral
- Levy your bank accounts and put the funds toward your debt
You can prevent these outcomes with several tactics.
- Negotiate a plan that involves setting up an affordable monthly payment
- Settle your debt with a single lump-sum payment (usually something like half the total balance)
- File bankruptcy to get a fresh start (the threat of this can often get creditors to negotiate)
At the very least, reach out to your creditor to try and make an agreement that benefits both parties. Neither the borrower nor the debt collector wants to have to go through the hassle of garnishment and liens. Just make sure to get any agreement that you do come to in writing.
⚠️ Most creditors can only garnish your wages or pursue your assets after going through the courts. However, the IRS cares nothing for the rules of mortals. They’ll happily bypass the courts (and the line of creditors) to satisfy a tax debt. If you owe multiple creditors, make tax debts your top priority.
What if you Aren’t Notified?
Some debt collectors will intentionally fail to properly serve creditors with a notice to avoid giving them a chance to appear in court (a practice called “sewer service”). If you’re a victim of this practice your first hint of a lawsuit can be a frozen bank account, a wage garnishment order, or even an arrest warrant.
⚠️ Sewer service is illegal. If you are victimized, notify the court at once and seek legal assistance.
Prevent Future Lawsuits
Getting sued by a debt collector is probably a sign that something is deeply wrong with your finances (unless someone is trying to scam you). You’re likely spending too much money, struggling to get by on an unlivable wage, or not paying any attention to your bills.
Whatever the reason, let it be a wake-up call. Look for the problems affecting your cash flow and address them as soon as possible. Build a budget to prevent your debts from ever get so out of control again.
If you need help getting your finances under control, consider working with a credit counselor. They’ll be able to help you manage your spending, rein in any bad habits, and rebuild your credit score.
📘Keep Learning: Are you delinquent on your debt and hoping to avoid a lawsuit? Take a look at our guide to debt relief that can help you dig yourself out of that financial hole: Debt Relief Options: Which One Should You Use?