Getting Sued By Creditors – Q&A

Getting Sued By A Creditor – What You Need To Know

If you default on a loan, the lender has the legal right to collect the debt by suing you in a court of law. The goal of the lender is to obtain what is called a money-judgement against you.

If you have any good reasons why you think you do not legally owe the debt, the court is the place to raise your defenses as well as consider bringing a counter-claim against the creditor under such legal theories such as breach of contract, fraud, and mistake.

Why Defend Against A Lawsuit If I Am Judgment-Proof?

It is important that you take action to protect yourself immediately even if you are unemployed, have no money, and believe you have nothing to lose.

Some debtors are judgment-proof which normally means that what little property they do have is “exempt” from collection under state law. But most debtors don’t remain judgment-proof forever. As soon as a debtor gets a job, a creditor with a judgment will be able to “garnish” up to 25% of the debtor’s wages to collect the court judgment.

If you are sued, you should immediately consult a lawyer who specializes in consumer rights. Your attorney should at least be able to buy some time and might be able to negotiate a settlement or repayment plan with the creditor.

Credit Counseling Option – What Is Debt Consolidation?

If you can’t afford to retain an attorney you might consider consulting with a credit counselor.

A credit counselor is effective if you have a number of debts that could be consolidated and negotiated into manageable installment payments. They deal with the creditors and try to work out a plan that is within your budget. Creditors would rather take thirty-cents on-the-dollar rather than getting nothing at all should you file for bankruptcy.

Defenses You Might Assert Against Collection Lawsuits

If the debt is old, it might be barred by the “statute of limitations”. For example, in most states, a creditor must file suit on a written contract within four years from the default of the contract.

Debtors Rights Alert:

Keep in mind that you can lose your statute of limitations defense if you have acknowledged the debt in writing after the debt has been barred by the statute of limitations or if you pay any portion of the debt (a form of acknowledging the debt) after the debt has been technically  barred by the statute of limitations. Many debtors fall into this trap by agreeing to make small payments after the debt has legally expired. When this happens the debt comes back to life and is now enforceable again. Don’t make this common mistake.

Affirmative Defenses 

When you are pleading your defense you can claim that the interest rate on the debt is “usurious” which means it is in excess of the state’s legal limit on interest rates.

You might have already made payments on the debt that were not credited to your account. If so, copies of your receipts and canceled checks can be used to prove your payment.

Finally, the property you bought on time might be “defective” entitling you to a substantial “offset” for the cost of repair. It can also be the basis of a counter-claim in which you allege the seller breached the contract.

This is especially true if the seller made express representations about the quality of the product that were not true, or even if the seller said nothing about the quality but the seller actually knew the product was defective in some material way. This is called fraud in the concealment or inducement of the sale. Both are not only civil wrongs but can be considered criminal conduct.

What If I Am Sued In Small Claims Court?

If you are sued in small claims court, you are not allowed to hire a lawyer to represent you at the hearing. If you wish, though, you may consult with a lawyer before the hearing to find out your legal rights.

You might consider using a pro bono attorney to assist you to prepare the court forms and help you with establishing your legal defense. Many law schools have pro bono programs.

In addition, in some communities, there are free small claims court advisors. Call the clerk of the small claims court to find out more about this.

Can I Be Sued For My Spouses Debts?

This depends on whether you live in a community property state or a common law state.

In a community property state, like California, if the debt was in incurred in the course of the marriage it is considered a “community property debt” and therefore the spouse will be equally responsible for repayment of that debt.

If your state follows common law rules, when determining who is liable for a particular debt, you will usually only be held liable for the debt if the obligation is in your name, or jointly held or if you have cosigned on the obligation.

For example, if the credit card was only in your spouse’s name, you will usually not be liable for that debt.

Debtors Rights Alert:

However, even in common law states, if you jointly own assets with your spouse, then the creditor may still attempt to seize jointly owned assets on the grounds that the asset was jointly owned even though the credit card to purchase that asset was only in the other spouse’s name.

If the debt is for a joint credit card in both your names, then you and your spouse will be held equally liable for the debt. In addition, if you are a cosigner on your spouse’s credit card or loan,  you are still be legally obligated for the debt.

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