A credit card company is suing you for unpaid debts. What do you do? This article explains how to handle a credit card lawsuit, different defenses you can use, and what to do if a judgment is entered against you.
Written by Attorney John Coble.
Updated September 29, 2021
A credit card company is suing you for unpaid debts. What do you do? This article explains how to handle a credit card lawsuit, different defenses you can use, and what to do if a judgment is entered against you. This article will also deal with how bankruptcy may be able to help you.
Defaulting on Credit Card Debt
If you fail to make your credit card payments, credit card companies will make your life more expensive by charging late fees and higher interest rates. These creditors will report negative information to the credit bureaus, which will then be entered into your credit history. As a result, your credit score may suffer.
To make matters worse, the credit card companies will repeatedly call you to try to find out when you can make your monthly payment. Since a credit card company is an original creditor, except in rare circumstances, you may not be protected from certain collection activities by the Fair Debt Collection Practices Act (FDCPA).
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Collection on Defaulted Credit Credit Card Debt
If you wait too long before making a payment, the credit card company may use a collection agency to attempt to collect the debt. The credit card company might give up on you and sell your debt to a debt-buying company. Collection agencies will continuously call you. They will send a lot of collection letters. They may even threaten legal action if you don’t pay.
The Fair Debt Collection Practices Act
The FDCPA protects debtors from abusive behavior by debt collectors. FDCPA protections generally apply to third party debt collectors. The FDCPA doesn't usually apply to original creditors. Third-party debt collectors include collection agencies and debt-buying firms.
The FDCPA provides many protections. For example, it prohibits debt collectors from calling you before 8:00 AM and after 9:00 PM. It forbids debt collectors from harassing you. The FDCPA forbids debt collectors from contacting you if you have an attorney representing you regarding this debt. The debt collectors must also stop contacting you if you send them a written demand to stop.
The FDCPA requires debt collectors to provide you with a written notice informing you of
The name of the creditor,
The amount owed,
That you have a right to dispute the debt, and
That you can request the name and address of the original creditor if that creditor is different from the current creditor.
Debt collectors must send this written notice within five days of the first date they have contacted you. If you dispute the debt within thirty days of receiving this written notice, the debt collector must stop contacting you until they can verify the debt. If you wait until after that thirty-day period to dispute the debt, the debt collector can continue to contact you, but still must verify the debt for you.
The FDCPA prohibits harassment by a debt collector. What behaviors are considered harassment? The following are a few examples of harassment for purposes of the FDCPA:
Repeated phone calls intended to annoy, abuse, or harass you or any other person answering the phone.
Obscene or profane language.
Threats of violence or harm.
Except for reports to the credit bureaus, any published list of people who fail to pay their debts is considered harassment.
Calling you without telling you who they are.
Lying about the amount owed.
Claiming to be an attorney when they aren't.
Making false threats that they'll have you arrested.
Threatening to do things they can't legally do.
Threats to do things that they have no intention of doing.
If a debt collector engages in harassing behavior, you can sue the debt collector under the FDCPA.
If a collection agency fails to collect a debt, then the original creditor or the debt-buyer (if the debt has been sold), may hire a law firm to collect the debt. The law firm will likely sue you. When you're sued, you will receive a summons and complaint. These documents let you know what you're being sued for, who is suing you, and how much time you have to respond. Your response is called an "answer." How long you have to file your answer will depend on your state's laws. If you fail to answer your lawsuit's complaint, the court will enter a default judgment against you. To use a sports analogy, a default judgment is like forfeiting a game. In other words, if you don't file your answer within the time allowed, you lose automatically.
You must file your answer at your county courthouse in the civil court clerk's office. In most cases, this is easier than it sounds. States often provide special forms to make it easier for individuals to file their own answers without having to hire an attorney. These answer forms can be obtained from your clerk's office. Sometimes, the forms are available online. A copy of your answer must also be served on (mailed to) the creditor's attorney.
Your answer is where you’ll raise your defenses. The most obvious defense is that you don't owe the money. This defense is rarely available since credit card companies aren't known for suing people who don't owe money to them. More common defenses include that the debt is time-barred due to the statute of limitations, identity theft, and/or a debt collector violated the FDCPA. Attorneys for credit card companies are often ready to make a debt settlement offer for less than the full amount due, once you have answered their debt collection lawsuit. They may provide this option because they want to save the expense of going to trial.
Every state has laws which limit the amount of time that can pass wherein a debt can be collected. These laws are referred to as statutes of limitations. These time frames vary across the different states. The triggering event that starts the time period differs among the states also. In cases where a court finds that the debt is time-barred due to the statute of limitations, the court will dismiss the case.
If you have been the victim of identity theft, you need to ask the creditor for their identity theft packet. Preferably, you'll do this before you're sued. After the credit card lawsuit is filed, identity theft is a defense if you can prove that the identity thief made the purchases that resulted in the debt.
If the creditor wins its debt lawsuit against you, they will receive a judgment from the court. The next step for the creditor is to use the judgment to collect money from you. The most common method of post-judgment collection is wage garnishments. A creditor with a judgment can take the money right out of your paycheck. If your employer fails to send this money to the creditor, the employer will have to send its own money.
There's a limit to how much a garnishment can reduce your take home pay. Federal law forbids a financial institution from taking more than 25% of your disposable income. For lower-income wage earners, the limit may be less than 25%. Paychecks aren't the only asset that can be garnished. Creditors can also garnish the accounts receivable of small business owners. It's important to know that financial institutions can't garnish Social Security checks.
Another common method of post-judgment collection is a bank account levy. The court will order a bank to take money out of your account to pay the judgment creditor. Unlike federal protection for wage garnishments, there is no federal limit on how much can be taken from your bank account. Yet, there is a federal prohibition on taking Social Security benefits and certain other protected assets from your bank account. However, this protection can get muddied if you commingle your Social Security checks and other protected assets with your non-exempt money. For this reason, you should have a separate account for your Social Security checks and other protected assets to be direct deposited into. Do not put any other money into the account where your exempt assets are deposited. If you do this, you will be able to prevent bank account levies from affecting that account.
For non-exempt accounts, you can use your state law exemptions to the extent they're available to protect your assets. However, you will only be able to use these exemptions after a creditor has levied your account. It could be a lengthy court process to get your money back.
Another collection method used by judgment creditors is called a judgment lien. A judgment lien arises when a certificate of judgment is recorded at your county's records office. Once the creditor records the judgment, a lien attaches to your property. Although it is technically possible for the creditor to sell your stuff, this tactic is rarely used. Creditors usually wait for you to try to sell one of your valuable assets such as your car or home. Before the sale can go through, you must pay the creditor to remove the lien.
You can present a defense to a judgment lien. State law exemptions can keep the lien from attaching to part of your property. For example, if you have sufficient exemption to shield your car and you sell your car, you'll be able to do so without paying off the lien. Note, that this is a difficult process and you may have to go to court to get permission to sell the car despite the lien.
Bankruptcy After a Collection Lawsuit
Bankruptcy stops all collection activity. This includes lawsuits. The automatic stay of §362 of the Bankruptcy Code is what stops all collection activity. This pause in collection activity is necessary to give the court time to figure out what's dischargeable and what's nondischargeable in bankruptcy. If a debt is discharged in bankruptcy, the prohibition on collecting the debt will become permanent.
Secured debts can only be discharged in a Chapter 7 bankruptcy by surrendering the collateral. Unsecured debts are those that are not secured by collateral. For example, if you have a car loan, it's secured since the car is the collateral securing the creditor’s interest in the loan. By contrast, credit cards are usually unsecured since there is no collateral associated with these accounts.
Since credit card debt is usually unsecured, a Chapter 7 bankruptcy can eliminate these debts with no issue. However, if the credit card company gets a judgment against you and then records that judgment, it becomes a judgment lien. Judgment liens are treated as secured debts. With a judgment lien, this collateral can include everything you own to the extent you have non-exempt equity in those assets.
If you want to discharge a secured debt in a Chapter 7 bankruptcy, you'll need to surrender your collateral. Since there would no longer be any collateral, the debt can be treated as unsecured. Few people want to surrender everything to discharge a judgment lien. For this reason, it’s important that you file bankruptcy before the judgment is recorded. Recording a judgment is treated as collections action barred by the automatic stay. Therefore, a judgment recorded after filing bankruptcy doesn't create a judgment lien. Without a judgment lien, credit card debt is unsecured, meaning it will be discharged in a Chapter 7 bankruptcy.
When a judgment has been recorded, if you have no non-exempt equity in your property, you can avoid it. "Avoid" is a term of art which means that the bankruptcy court deems the otherwise secured debt as an unsecured debt. If the judgment lien has been recorded and can't be avoided, your best bankruptcy option may be a Chapter 13 bankruptcy. A Chapter 13 bankruptcy features a payment plan of 36 to 60 months that can be used to pay off any secured debts. This allows a Chapter 13 bankruptcy to discharge the remainder of certain secured debts.
If you fail to pay a credit card company, you may eventually be sued. Bankruptcy may be a good option to prevent additional hardships stemming from credit card default. If filing for bankruptcy is the best option for your situation, it's better to file before a lawsuit is reduced to a judgment.
If your bankruptcy case is simple and straightforward, Upsolve has a free tool to help you file your own Chapter 7 bankruptcy. For more complicated cases, it’s best to see an experienced bankruptcy attorney or legal aid organization in your area for a free consultation and legal advice on how to protect yourself.