When you fall behind on your credit card payments, your credit card company has a legal right to file a lawsuit against you.
Bankruptcy to Stop Creditor Lawsuits
If you have been sued by your credit card company, you’ll want to know your options. Below we discuss what it means to be sued by your credit card company, and how to protect yourself if you have facing a lawsuit.
A credit card company is able to sue you to recover the money you owe on a line of credit. But there are other reasons a company might pursue a lawsuit against you, including:
You break the terms of the contract. When you received the line of credit, you either signed an agreement either electronically or in writing that outlined both the credit card company’s rights and responsibilities as well as your own. When you fall behind on making payments, that constitutes a violation of that agreement.
A collection agency has bought the delinquent credit card debt from the credit card company. Often times a credit card companies will try to minimize their losses by selling the debt you owe to a debt collector. When that happens, the debt collector is the legal owner of the debt. The debt collector possesses most of the same rights the original creditor possessed. Where this can lead to a lawsuit is if you fail to settle the debt you owe with the debt collector, that debt can be resold and resold until it reaches a debt collection attorney’s office, where you will then be sued. Typically, you have one last chance to settle the debt before it becomes a lawsuit situation.
Once a lawsuit is filed against you, you will need to find a way to defend yourself. If you are unable to defend yourself against the lawsuit, you are automatically held legally liable for the full amount stated in the lawsuit.
What to do When Facing a Credit Card Debt Lawsuit
If a credit card company is bringing a lawsuit against you, you should know that state law controls what procedures the credit card company must abide by.
This is the typical procedure:
A credit card company will first file a document called a “complaint” in the county where you lived where the line of credit was first obtained. This complaint describes how much you owe and why the credit card company believes you owe it.
You must then file an answer to that complaint where you either admit or deny the statement. You should also include any defenses to the complaint in this answer.
When that notice that you are being sued by a credit card company comes in the mail, or is delivered right to your doorstep, it’s okay to feel terrified. That’s perfectly normal. But the number one thing to remember is that you cannot ignore the situation, regardless of how scared you feel.
According to Steve Rhode, founder of GetOutofDebt.org, “The tragedy…is not that the consumer was sued but that most never respond.”
If you ignore the lawsuit, the credit card company can get a judgement against you, which will allow the credit card company additional powers to be able to collect the owed debt. These additional powers include seizing bank accounts or garnishing wages, in some states.
What you need to do is then determine if you owe the debt in question and then respond to the complaint that you have received.
What To Do
If you know you owe the debt and the amount is correct, there are some things you can do:
Act quickly. “Once sued for collection, get immediately involved in the solution,” according to debt settlement expert Michael Bovee.
Work to get some cash together. While it can feel awkward to ask for money from a family member or friend, it can be a quick way to pay or settle your debt immediately, as well as conclude the complaint. “A reduction in balance owed or beneficial repayment terms are entirely possible outcomes,” says Rhode.
Remember that you might be able to reach a settlement for a smaller amount of money owed. According to Bovee, consumers will typically have to come up with 60% – 100% of the owed amount to be able to stop the lawsuit. While you might have to pay the full amount, smaller settlements are possible in some situations.
After you settle the debt, remember to get written documentation from the creditor that acknowledges that you have paid the amount, and as a result the lawsuit will be dropped. This is especially important in cases where you have reached a settlement for less debt than is owed. Without this written documentation, a creditor could potentially say your settlement was a “payment” and still sue you for the balance.
“Be certain you are agreeing to a settlement that will also result in the dismissal of the lawsuit,” Bovee says. “Settling quickly means you can avoid a judgment damaging your credit report.”
If you cannot afford to pay or settle the debt, work with a bankruptcy attorney. Abankruptcy attorney will be able to advise you if you are a good candidate for bankruptcy, and if filing bankruptcy is a good way for you to handle debt you cannot afford.
Bankruptcy is an option, as the filing of a bankruptcy will delay or stop a credit card lawsuit regardless of how far along it is. Remember that bankruptcy has far lasting effects, and the effect of the bankruptcy on the lawsuit and the underlying credit card debt is completely dependent on the claims alleged in the lawsuit as well as the form of bankruptcy you file: either Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 and Chapter 13 Bankruptcy
Chapter 13 bankruptcy is designed to allow you to keep all of your property, but is also determined by your property. The amount of your nonexempt property affects how much unsecured creditors get paid during your bankruptcy process. And to avoid foreclosure or repossession, you still need to keep up with the payments you make for you secured debt, such as mortgages or car loans.
When you file a Chapter 7 bankruptcy, almost all of your assets and property are liquidated and thus become property of the bankruptcy estate that is sold to allow you to repay your debts. There are some exceptions to this though.
During your Chapter 7 bankruptcy, a bankruptcy trustee is appointed and given the authority to sell your assets so that you are able to pay your creditors. Just because your assets are being sold, that does not mean that all of your property needs to be sold.
Bankruptcy and Credit Card Lawsuits
When you file for bankruptcy, an automatic stay is created. This automatic stay prohibits most creditors from being able collect debts from you, including through the process of credit card lawsuits. An automatic stay will stop the lawsuit until the bankruptcy is completed, dismissed, or a bankruptcy court lifts the stay.
What happens with the credit card lawsuit is dependent on whether you filed a Chapter 7 or Chapter 13 bankruptcy. Here’s what happens for each form:
Chapter 7 Bankruptcy
A Chapter 7 bankruptcy is normally completed and discharged within a few months. An automatic stay stops the credit card lawsuit from proceeding. Once the bankruptcy process is completed, if the underlying credit card debt is discharged through the process then a creditor can no longer collect the debt. The lawsuit is typically dismissed.
Chapter 13 Bankruptcy
In Chapter 13 bankruptcy, a debtor must pay a portion of their debts through a repayment plan. This repayment can be stretched over a three to five year period. Like in Chapter 7 bankruptcy, the credit card lawsuit is stopped by an automatic stay. The credit card lawsuit debt is then treated as other unsecured debts such as other credit card debt and medical bills.
If the bankruptcy plan is completed and you receive a discharge, a creditor is not able to force you to pay the debt. That means the lawsuit is dismissed. But if you fail to make the planned payments and your case gets dismissed prior to a discharging of your debt, the automatic stay ends and the lawsuit will resume.
A Note About Credit Card Lawsuits that Allege Fraud
If you receive a claim from a credit card company that is based on fraud, you should know that claim is nondischargeable in bankruptcy. While a credit card lawsuit that alleges you committed fraud will be stopped by the automatic stay, typically a creditor will file an “adversary proceeding” in your bankruptcy. This is a proceeding that asks the court that the fraudulent debt not be discharged. If the debt is found to be nondischargeable, the creditor is able to resume collection efforts after the bankruptcy is completed.
Working with an Attorney
Being hit with a credit card lawsuit, or facing bankruptcy is a scary thing. There might be ways to avoid it and still keep your credit intact. Working with a bankruptcy lawyer will ensure you are made aware of all the options available to you. Because bankruptcy law can be confusing, it’s highly advised that you work with a bankruptcy attorney that can walk you through the process and clarify any questions or concerns you might have should you decide to file. There can be a lot of questions during this extremely stressful time. Let the lawyers at Resnik Hayes Moradi LLP walk you through the process so you can achieve the best outcome possible.