New Year Resolution #6: Deal with the Creditor Lawsuits and Judgments Now Against You, and Prevent All Future Ones
You’ve been sued by one or more creditors. They have a judgment or are about to get one. You can stop them from garnishing your paycheck.
When you get sued by a creditor, you have a certain amount of time to respond to the lawsuit after you receive the “summons and complaint.” By responding we mean formally filing a document in the court where the lawsuit was filed, usually called an “answer,” stating which allegations in the complaint you agree with and which you deny and disagree with. If you respond on time, the case goes through a process of “discovery”: the facts in disagreement are brought to light through documentation and/or personal sworn testimony in “depositions.” If that does not lead to a settlement of the case, it can go to trial where the disputed allegations are decided upon by either a judge or jury.
But in a large majority of lawsuits by creditors, the people being sued do not respond within the time provided by filing an “answer.” They don’t for some understandable reasons. There is usually nothing in the complaint about which they can disagree. Most of the complaint simply says that the person being sued owes a debt and hasn’t paid it, and is legally obligated to pay it. That’s usually all true.
Beyond that, often the person being sued is so overwhelmed financially and emotionally that they don’t even try to read the summons and complaint. And if they do try, these documents are often confusing. It usually takes meeting with an attorney to understand them, the options for dealing with them, and the likely consequences of each option. But people seldom have money to pay an attorney for this kind of advice if they have no money to pay their creditors.
As a result most creditor lawsuits turn into “default judgments.” This means that the time provided for filing an “answer” expires without one being filed, so the creditor tells the court that time has passed and that as a result the creditor is entitled to whatever it asked for in the “complaint.” The creditor asks for a “judgment” stating that the person owes the debt and the creditor is entitled to be paid. The judge, after reviewing the documents provided by the creditor—but likely only in a very cursory fashion—gives the creditor the requested judgment against the person being sued.
The judgment amount almost always includes the creditor’s costs for bring the lawsuit, including court filing fees and its attorney fees, plus whatever interest had been accrued up until then. PLUS future interest is usually allowed to accrue until the judgment amount is paid in full.
Effect of a Judgment
What people being sued often don’t realize is that a judgment gives a creditor a great deal of power it didn’t have before.
Most directly, it usually gives the creditor the right to garnish your paycheck and bank accounts. That means that your employer and financial institution can be ordered to pay part of your paycheck and/or bank account to the creditor to satisfy all or part of the judgment amount.
You can also usually be ordered to appear at court for a “judgment debtor examination,” where you would be questioned under oath about what assets you have which could be grabbed to pay the judgment.
A judgment also often results in a “judgment lien” against the real estate you own, including your home. This may even allow the creditor to foreclose on the real estate to get paid, or at least require you to pay the debt if you refinance or sell the real estate.
Once a creditor has a judgment, it is usually in effect for many years (10 years is a common length), and in many cases can later be extended for another chunk of years (for another 10 years, for example). Throughout those years the creditor can try to collect on the judgment in the ways stated above.
And not only does interest usually continue to run, the creditor can also add the cost of its attempts to collect, such as any court fees and attorney fees for preparing garnishment papers. Because of these added costs, the balance owed on the judgment is reduced that much more slowly as these additional costs and interest must be paid before any money goes to pay down the original judgment amount.
Relief from This Vicious Cycle
If you file bankruptcy, doing so gets you out of this mess in many ways that work together:
- Any creditor which has a judgment against you will have to immediately stop trying to enforce that judgment. That means no more garnishments, judgment debtor examinations, or any other forms of collecting on a judgment from the moment your bankruptcy case is filed.
- Any creditor which has sued you but not yet gotten a judgment against you won’t be able to get that judgment when the deadline for you to respond to the lawsuit has expired. Usually the lawsuit will be thrown out, or “dismissed.”
- Any creditor which is considering filing a lawsuit against you will usually be permanently prevented from doing so.
- The debt that caused the lawsuit and judgment, or that could result in a future lawsuit and judgment, will likely be discharged—permanently written off—in your bankruptcy case. After your bankruptcy case is over, the creditor will be forever forbidden to pursue the debt in any way, including by enforcing a prior judgment or by getting a new judgment.
- Judgment liens against your home can often be “avoided”—taken off the title to the home.
So, usually, at the end of a bankruptcy case—whether a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts”—the person filing bankruptcy owes no debts (or no debts that he or she does not choose to keep). Whatever lawsuits were filed and whatever judgments were entered against him or her before the bankruptcy was filed would have no further effect. And there would be no further danger of new creditor lawsuits and judgments.