Very often I get a phone call from a terrified client who is being sued in state court. The client typically wants to see me that same day and has millions of awful thoughts running through his or her head as to what is going to happen next. Lets back track a little bit first. How did we get this far and why does someone get sued? Prior to the filing of any bankruptcy, a creditor’s remedy to collect on any unpaid debt is to file a complaint in state court in order to get their debt reduced down to a legally enforceable judgment. The judgment is needed in order to legally enforce a collection action and actually collect against someone’s will.
For example, suppose someone owes money to a credit card, hospital, a landlord, or a furniture store. A creditor wanting to collect on any of these debts will first utilize direct communication with the debtor by calling about the debt and / or sending letters demanding the debt be paid. When these efforts fail, the creditor can assign, transfer, or sell the debt to a collection agency to try the same thing. While this step is not required it is often done by major financial institutions in order to clear an account from their books. Most major institutions want to only hang on to accounts that are less than 180 days delinquent. Once the debt is transferred, sold, or assigned to collections the original creditor will report the account as “charged off”, which is a serious negative connotation on your report. The last step for either the original creditor or the collection agency that has possession of the original debt is to file a lawsuit.
A lawsuit commences with the filing of a complaint and summons in state court. The complaint lays out the accusations against the debtor. Typically breach of contract and money damages for that breach. In the case involving furniture or a landlord, the creditor will also ask for possession of the furniture or premises. The debtor typically finds out about the lawsuit when he or she gets served. Services of process is typically done by an uninterested third party which can be a hired process server or even the sheriff’s office. This means someone will come to your residence or your place of work and directly hand the summons and complaint to you. The process server will then file a declaration with the court stating that debtor was served. This process can be scary, embarrassing, and often times incite anger.
Once you have been served you have 30 calendar days to file a response to the lawsuit or just 5 calendar days in the case of an eviction for unpaid rent to the landlord. The time period is very crucial; because once the deadline passes the creditor can file for default judgment. Often times clients are surprised as to why the case against them was never heard in court or why they never got to tell their story to a judge. The usual answer is because the debtor failed to timely respond. With a judgment in hand a creditor can then proceed to enforce that judgment by either having sheriff withhold 25% of your net paycheck, levy the entire contents of your bank account, replevin (take control of your furniture), or eviction (forcefully remove you from your tenancy) to satisfy the debt obligation.
The good news is that a bankruptcy filing will put on hold all of these actions and if done quickly enough can even reverse some of the damage already done. A bankruptcy filing will make the judgment unenforceable. It will prevent the sheriff from taking your wages, levying your bank account, repossessing your furniture, or evicting you from the property during the pendency of your bankruptcy. But do keep in mind that you will have to eventually catch up your rent or move out and likewise return your furniture or pay for it under a new agreement enforced by the bankruptcy court.
A common misunderstanding about lawsuits and their enforcement is known as the statute of limitations. It is true that most debts can only be reported for seven years on your credit report and a lawsuit can only reach judgment if the debt is less than four years old. However, it is your responsibility to enforce these rules. A credit reporting bureau can always erroneously report a debt older than seven years and you will have to initiate a dispute with the credit reporting bureaus to get that account remove. Likewise a creditor can still sue you for a debt that is older than four years and you will have to hire an attorney and pay a filing fee to prove the account is older than four years and the lawsuit must be barred by the statute of limitations.
With that in mind it is often cheaper and quicker to file a bankruptcy rather than to fight the lawsuit in state court. So if you are being sued or just got served and don’t know what to do, know that there is help available. Just contact Mark Shmorgon at 916-640-7599 for a free bankruptcy consultation or write him at firstname.lastname@example.org.