Last updated Aug. 30, 2017.
You’ve received a summons and complaint, your credit card company has filed a lawsuit. What to do now? Should you file for bankruptcy?
First, understand that credit card debt is a type of unsecured debt, meaning that if you can’t make payments, your credit card company cannot come after your personal property right away. In order to come after your assets, they must first sue and obtain a judgment, which is a court document stating a valid debt is owed and which gives the creditor the right to pursue assets of the debtor to satisfy it.
The extent to which a judgment creditor can pursue a consumer is a function of state law, with each state granting creditors slightly different options for pursuing judgments. Read on for what happens if a credit card company sues you, and how bankruptcy and debt settlement options may help.
When a Credit Card Company Sues You, They Want a Judgment
Why is my credit card company suing me? Because they want a judgment.
If the debt owed is valid (which it usually is), it is likely that the credit card company will be able to obtain a judgment for the full amount that is past due — although there are credit card lawsuit defenses that can be raised.
This is not because the credit card companies have a team of star litigators on the payroll. No, it’s because debtors usually do nothing when faced with a lawsuit. It is a rare debtor that will file an answer to a complaint to dispute even a valid debt. This allows the credit card company to win the lawsuit by default.
Why is this important?
As mentioned above, the judgment is the court’s determination that the debt is due. In most states, obtaining this validation of the debt from the court system is a condition that must be met before the credit card company can attempt to change its position from unsecured creditor to secured creditor. In other words, they sue to obtain a judgment, which allows them to come after your property or income in satisfaction of the debt.
The judgment will be recorded in the county where you live. From there, the credit card company can go forward with a bank levy or wage garnishment. Your credit card company may even put a lien on your real estate.
What will bankruptcy do in a credit card lawsuit?
Bankruptcy (either Chapter 7 or Chapter 13) puts a stop to any collection proceedings, including lawsuits, through the power of the automatic stay. Your creditors will be notified of the stay, so any wage garnishments or foreclosure actions also will stop.
Filing for Chapter 7 bankruptcy also can eliminate the personal liability associated with the judgment, which will clear your obligation to pay the debts. However, be aware that once a judgment attaches as a lien on your property, it will be harder to get rid of. For this reason, it is not a good idea to wait too long to act once a collections proceeding has been initiated against you.
You will not be able to sell the property until the lien is paid or removed, and in some cases, the creditor may sell the property to pay the lien. If the property is exempt (e.g., your house or car), that lien can be removed pursuant to 11 U.S.C. Sec. 522(f).
This is not part of the ordinary bankruptcy procedure. While your bankruptcy is open, you must request your attorney to file a Complaint to Avoid Lien, such as this example in California; there is typically an extra charge for such an action.
Should I opt for debt settlement instead?
In some cases, being sued by a credit card company can be a positive thing as you or your attorney can call the firm on the other side of the suit and negotiate a large reduction in the balance you owe. Often, debt settlement negotiation can help the debtor avoid bankruptcy as well as an unpleasant judgment.
However, debt settlement is an industry wrought with scams. Most companies require you go further in default while saving up to pay off creditors. While you save, creditors can take action. There also may be tax consequences associated with debt settlement.
The bottom line is this: if you’ve been sued by a credit card company, call an attorney right away to explore your options. Ignoring the lawsuit will only play into the hands of your creditors — which is exactly what the credit card company is banking on.
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