What happens when you are sued by a debt collector? While it may feel like the end of the world to you, it’s a pretty routine occurrence in courts across the country. “Most debt collection law firms file hundreds of lawsuits a day, assuming that 99% of defendants will not answer,” explains Atlanta bankruptcy attorney Jonathan Ginsberg.
While it would be easy to dismiss these as simply a matter of debtors getting what they deserve, it’s not always cut and dried. It’s not unheard of for a debtor to be hounded by multiple collection agencies for the same debt. Or “zombie debts” may show up in court years after the debtor defaulted.
A recent New York Times story compared the recent spate of debt collection “robo-lawsuits” to the “robo-signing” mess in the mortgage industry and quoted Brooklyn Civil Court Judge Noach Dear as saying, “roughly 90 percent of the credit card lawsuits are flawed and can’t prove the person owes the debt.” Judge Dear says he sees as many as 100 of these cases a day.
Even when debts are legitimate, the additional costs that result from a lawsuit can make it that much harder for the borrower to resolve the debt.
So what can you do if you are sued by a collection agency? Here are seven options:
The number one mistake borrowers make when they are sued for a debt is failing to respond to the notice, which usually arrives in the form of a “summons and complaint.” If you owe the debt and can’t pay it, then you may assume there’s not much you can do. If you fail to respond, however, the collection agency will get a default judgment against you. That opens up new avenues of collection for them, including wage garnishment or the ability to take money from your bank account, depending on state law. Worse, the collector may be able to add attorney’s fees, court costs, or interest to the balance. In some cases, the balance can double or triple due to these additional costs.
Responding to a debt collection lawsuit, then, is a must. “Even if you owe the plaintiff money, a two-sentence response denying liability to the lawsuit filed in court will likely lead to a negotiated settlement that will save you money,” advises Ginsberg. “If you do respond and force them to work, they will either back down or offer a settlement on favorable terms.” He adds that it is not sufficient to simply send a letter to the plaintiff (the person bringing the lawsuit). “You must file your response to the lawsuit, called an “Answer,” in the court where you were sued within the designated time to respond — usually 20 to 30 days after service — and you must send a file stamped copy of your answer to the plaintiff’s lawyer.” You can get a file stamped copy from the court where you filed the answer.
When you do respond, don’t just state that you can’t afford to pay the debt. “If you admit liability then 90% of the fight is over and they are not forced to prove their case,” warns Billy Howard, attorney and head of the consumer protection division of Morgan & Morgan. He likens it to a criminal case where the defendant says, “I did it!”
2. Challenge the Lawsuit
“Challenge the plaintiff’s ability to bring the lawsuit by challenging their standing to sue in their own name,” suggests Ohio consumer lawyer, Troy Doucet. He explains that credit card debt is often bought for pennies on the dollar, by collection agencies, which then sue to collect. “The collection company needs to prove they have the right to collect, as evidenced by a transfer of the signed credit card agreement, in order to be in court and ask the court to win. The right to sue is called ‘standing’ and what the consumer should challenge.”
Howard agrees: “Ask the court to dismiss the case because they don’t have standing and lack the chain of custody of paperwork. A lot of judges look at the paperwork (collectors provide) and tell the plaintiff that they must be joking.”
3. Make them prove what you owe
“We always demand to see the original signed agreement and a balance on the account from zero to the present,” says Ginsberg. More of than not, the debt collector’s documentation will be inadequate. Debts may have changed hands multiple times before the current collection agency purchased them.
Even original creditors may lack accurate documentation of the debts customers owed. A former employee of JP Morgan Chase says she was fired after she raised questions about the documentation being provided to buyers of the issuer’s delinquent debts. She alleged that as many as a quarter of the files showed incorrect amounts owed, with errors often in the bank’s favor. If credit card issuers can’t provide accurate documentation, there’s a good possibility collection agencies won’t have it either.
4. Raise the Statute of Limitations as a Defense
In most states, creditors have a maximum of four to six years to sue to collect a debt. After that, the statute of limitations expires. That doesn’t always stop collectors from suing, however, because they are counting on borrowers failing to show up in court. If the statute of limitations has expired, and the borrower raises that as a defense, the collector will lose. Making a payment on an old debt may start the clock ticking all over again, though, so a debtor should get legal advice before making a payment on a very old debt.
5. Sue Them Back
If a debt collector has violated provisions of the Fair Debt Collection Practices Act, you may be able to sue them. “Once you attach their lawsuit as Exhibit A to your lawsuit against them the tide turns, and if you or your attorney knows what they are doing, the alleged debtors can get damages and attorney’s fees and costs,” says Howard. He’s referring to the fact that consumers who successfully sue for violations of the FDCPA are entitled to statutory damages of $1000, plus punitive and economic damages, if awarded. In addition, the collection agency will be required to pay the attorney’s fees and costs.
6. Bring in the Big Guns
Debtors often hesitate to contact an attorney when they are being sued over a debt they owe; perhaps due to embarrassment, or maybe they figure they can’t afford one. Attorneys who regularly take on these types of cases, however, will typically offer a free consultation. And they will often represent a consumer for free if they think the collector has broken the law. That’s because they will expect to collect their fees from the plaintiff. “Do not be afraid or intimidated to call or email a consumer protection or bankruptcy lawyer for a quick word of advice,” Ginsberg says.
Once the collection agency is notified that you are represented by an attorney, it may be much more amenable to settling the debt, rather than trying to duke it out in court.
7. File for Bankruptcy
While bankruptcy usually doesn’t make sense when you just owe a small amount of money, if the debt you are being sued for is large or if it is just one of many other debts you owe, it may make sense to file for bankruptcy. When you do, you will be protected by the “automatic stay,” which will halt collection efforts against you.
A tip: If you are thinking about bankruptcy, it’s best to talk with an attorney as soon as you are served with notice of the lawsuit, rather than waiting until the day you’re due in court.
While dealing with a debt collection lawsuit, it’s still important to keep an eye on your credit scores, and to periodically check your credit reports. Though your credit has taken a hit, watching your credit can alert you to new potential problems that you can work to resolve before they become bigger problems. You’re entitled to your free annual credit report from each of the major credit reporting agencies. And you can monitor your credit scores for free using a tool like Credit.com’s Credit Report Card, which updates your scores monthly, and gives you an overview of your credit profile.
More on Managing Debt:
- The Credit.com Debt Management Learning Center
- How to Pay Off Credit Card Debt
- 5 Tips for Consolidating Credit Card Debt
- Understanding Your Debt Collection Rights
- Top 10 Debt Collection Rights