Seven Things You Need To Know About Creditor Lawsuits
- Filing a lawsuit against a debtor is not a creditor’s first choice. A lawsuit usually comes after many months and sometimes years of chasing after a non-paying debtor. Creditors know that even if they file a lawsuit, it can be quickly neutralized with bankruptcy.
- When a debtor fails to respond to a creditor lawsuit, the creditor will win a “default judgment” which will give them the power to take extreme collection actions against the debtor, such as seizing a bank account or garnishing wages.
- Responding to a creditor’s lawsuit with an “answer” will buy the debtor more time to put together more money or to file Chapter 7 bankruptcy or Chapter 13 bankruptcy.
- If a debtor fails to pay a judgment a bench warrant for their arrest could be issued by the court (not the creditor). A judgment is a judicial order and if it is not obeyed there could be legal consequences. Only bankruptcy can neutralize a judgment.
- Creditors file lawsuits because they want payment and are often willing to settle for a lesser amount of money. However, any settlement offers need to be in writing. Beware of “debt settlement” firms who claim they can settle your debts for pennies on the dollar. You don’t need them to settle your debts. Creditors filing lawsuits often offer settlement amounts; but the forgiven debt may be taxable. However, debts settled or discharged in bankruptcy are not taxable.
- A creditor who wins a judgment can garnish your wages or seize your bank accounts without warning. Only bankruptcy can stop the garnishment or bank seizure order. If a creditor seizes your assets after you file bankruptcy, you have legal recourse and you may be able to get those assets back.