Debt has its consequences, some of which will surprise the average American consumer.
For example, when you default on credit card debt, the major consequence could be a lawsuit.
Hold on. Can a credit card company sue you? Yes, it can.
And pushed into extreme circumstances, yes, it certainly will. In a heartbeat.
The bigger question: What to do if you are sued by a credit card company?
First, never ignore calls from a credit card company. That just makes things worse and paints you as negligent. Study the complaint carefully for accuracy. Try to negotiate a settlement with the card company, if possible.
Here’s the bottom line. Credit cards are not play toys.
Most importantly, make sure the lawsuit is accurate. Sometimes, your account is “sold’’ to a debt collection agency, which specializes in harassment and strong-armed tactics. The amount they say you owe? It might be incorrect.
If it gets to this stage, be ready for a fight, which may include hiring a lawyer. It’s never pleasant when a giant financial institution sets its sights on you, but you do have rights.
Here’s the bottom line. Credit cards are not play toys. They come with obligations, carefully spelled out in the voluminous pages of fine print (probably ignored while you studied the periodic interest rate and borrowing limit).
But when signing up for the card, you accepted those terms, whether you read them or not. Somewhere in that sea of legalese, it spelled out the conditions if you defaulted.
Falling behind on credit cards is quite common. According to the Federal Reserve, American credit card debt reached $949 billion in 2016.
Understand, too, that credit card companies don’t sue capriciously, but if you fail to make the minimum monthly payment and have a high balance, you’re going to get the dreaded phone call or court summons.
If you don’t return those calls — or decide to push the episodes out of sight like they were a bad financial dream — it’s just going to get worse.
Here’s the step-by-step action plan on what to do if you are sued by a credit card company.
Make Sure You Actually Owe
Don’t assume the credit card company is right. Giant corporations aren’t infallible. You might not owe a penny. You might be a victim of identity theft. Or, the debt you once owed can no longer be collected. Don’t let yourself be bullied.
There are several reasons you’re could be in the right:
- The debt was paid — You have the receipt. They made a mistake. In this case, the legal “Answer’’ will be a few sentences and it’s all over.
- Statute of limitations has run out —Every civil lawsuit must be filed within a certain time frame. The statute of limitations vary from state-to-state, but most are in the 4-6 year range. The clock starts ticking on your case the date of your last credit card payment. If the complaint was filed with the court after the statute of limitations ended, the lawsuit should be dismissed, but only if you show up in court that day and tell the judge the statute of limitations expired.
- Fair Debt Collection Act —It’s a federal law that requires debt collectors to provide information about your debt. If the company violated provisions, you can countersue. Read the law at https://www.ftc.gov/enforcement/rules/rulemaking-regulatory-reform-proceedings/fair-debt-collection-practices-act-text
- Fraud —Someone could have stolen your identity or your credit card and made unauthorized purchases.
- Mistaken identity —Perhaps you never signed up for the credit card or had any business with the company. It’s wise to run a free credit report to see if an account was opened in your name.
- Bankruptcy —If you filed for bankruptcy and your credit card debt was wiped out, that’s a viable defense.
- Shoddy bookkeeping —According to the New York Times, which published a series of stories beginning in 2012 that tracked collection tactics of credit card companies, a New York state civil court judge said “90 percent of the credit card lawsuits are flawed and can’t prove the person owes the debt.’’
However, the Times reported that that 95% of credit card collection cases go uncontested, meaning the consumer didn’t show up in court. The companies win default judgments, giving creditors the ability to garnish your wages or bank account balances. You can’t win if you don’t show up for a court trial.
In 2015, the Federal Trade Commission reported that debt collection complaints topped the list of consumer complaints it received (897,655 or 29%). About 30 million Americans have at least one debt in collection. According to the Bureau of Labor Statistics, the debt collection industry grew at a rate of 23% during a four-year period that ended in 2016, a much faster rate than the average for all industries.
What to Do if You Owe the Debt
When you’re sued, you’ll be served with a copy of the complaint and a court summons that tells you how you can file a response in court and the date of your court hearing. You have roughly three or four weeks to respond, which means you need to act quickly. Some of your options, like offering to settle the debt, can happen out of court. Others will require you to respond directly to the suit or use bankruptcy court.
Try to Settle with the Credit Card Company
Lawyers don’t work for free, and court cases cost everybody money. So, the credit card company has some incentive to cut its losses and avoid going to trial. The company might put up a hard-line approach at first, but the attending supervisor likely will be interested in simply recovering as much of the debt as possible.
Credit card companies write off millions each year in uncollectible debt. The cost is passed on to consumers in the form of higher interest rates and fees.
Offer to pay a portion of the debt. Ask the company to forgive the rest and cancel the lawsuit. Also ask to be held blameless, so your credit score won’t be harmed. If the company agrees and the suit is dropped, be sure to get written notification. You don’t want the company to claim your “settlement’’ was actually a “payment’’ — then have it sue you all over again.
Also, carefully examine the debt. If it’s inflated with penalties and late fees, those can be negotiated away. Review your contract to determine what fees can be legitimately added for late payments. If the debt seems littered with baseless fees, speak up!
Don’t Ignore Calls
We understand that you might get a dozen or so robotic sales calls on a typical day. We get the fact that you might have zoned out.
But be careful. If the credit card company is chasing you — and you owe the money — don’t give the lender any reason to put a red circle around your name and think you’re avoiding payment.
Call back immediately. Get a full understanding of the problem.
There could be an error, particularly if you have always paid on time, or a dispute with a vendor might never have been corrected. These days, you could also be the victim of identity fraud.
In any of these cases, you might be able to dispute the debt over the phone and resolve it quickly. Nightmare over, with one return phone call.
That’s the best-case scenario.
If the debt does belong to you, write a drop dead letter telling them to cease and desist all communication. That should give you some breathing room to come up with a debt elimination strategy.
Respond to Any Lawsuit
If good-faith efforts don’t work, you might be looking at a lawsuit, often the last resort after a series of collection attempts.
Avoiding phone calls will accelerate that process. Sometimes, if a lender decides that collection attempts aren’t financially worthwhile, the debt can be sold to a collection agency, which means a new set of collectors will go to work on you. Your debt could be sold again and again. If it isn’t resolved, a lawsuit is only a matter of time.
Credit card companies write off millions each year in uncollectible debt.
If a lawsuit is filed, you MUST respond. If you don’t show up for the court proceeding, the judge automatically rules against you and will order you to pay the full amount.
Credit cards are unsecured debt — meaning there’s no collateral at stake, such as a home or car — so the lender has limited options for collection. Lawsuits can happen quickly if there’s no communication or acknowledgement.
Seek Legal Services
When you think of lawsuits, you think of lawyers. The credit card company will have at least one. Should you?
Good reasons to get a lawyer include:
- The lawsuit involves a lot of money and you don’t feel comfortable representing yourself in the legal process.
- You already know a lawyer who was successful in a civil case, particularly one who is referred from a friend or family member.
- To navigate you through complicated situations. Lawyers can determine if the state statute of limitations has expired or whether the Fair Debt Collection Practices Act has been violated.
- You can find a lawyer by searching online for “consumer lawyer” or by using referral services from local or state legal bar associations. You can check if complaints were filed against your potential attorney.
- Good reasons to skip hiring a lawyer and instead defend yourself include:
- You’re confident in your ability to present your case to a judge who may not be sympathetic to consumers.
- You have kept good records of credit card spending and believe the charges against you are incorrect.
- The amount owed is less than the potential legal fees.
You must determine how much time you have to respond to the complaint by calling the court clerk or searching court websites. You must draft your response (called an answer) and address each allegation. You must construct your case and prepare for trial. It’s all a little more involved than TV courtroom dramas and it’s certainly not for everyone.
Challenge the Right to Sue
There’s a sports adage that the best defense is a good offense. If a credit card company sues you, one strategy is to challenge its right to do so. It’s the plaintiffs’ responsibility to prove that you owe them money. Make them do it. Debt often gets sold, so ask for documentation of a credit agreement that you signed and proof that the paperwork is accurate and came from the original creditor. This can be done without a lawyer.
Demand they account for every dollar they say you owe by showing how your activity increased the balance, that fees and charges they claim you owe were part of the original credit agreement you signed and that the current balance is accurate. If the company can’t provide this documentation, the lawsuit may be dismissed, or the company may agree to settle for a lower amount.
File a Petition of Bankruptcy
Maybe you owe the debt, but your overall financial situation means you can’t pay it. In that case, filing for bankruptcy may be your best move. When you do that, all debt collection activity must cease while the bankruptcy is handled.
Understand: Bankruptcy has a considerable impact that can take years to recover from, but it can be a first step toward getting out from under overwhelming debt and move you toward rebuilding your credit. Talk to a lawyer immediately about whether filing for Chapter 7 or Chapter 13 bankruptcy is right for you. Waiting until just before a lawsuit-related hearing may require your lawyer to file an emergency bankruptcy petition, which can be more expensive.
What Happens Next?
If the matter goes to court, here are the potential outcomes:
- You Win —The court rules in your favor. Depending on the circumstances, you might opt to go on the offensive and request damages from the credit card company to recover your legal costs.
- Dismissed —If a judge dismisses the case, the litigation is over. The credit card company could also refile the lawsuit, so it’s best to get a dismissal with prejudice, putting a definitive end to the matter.
- You Lose —If the credit card company wins, it will ask the judge for authority to collect its money. Your wages could be garnished. Liens could be placed on your property or it could be forced into a sale. It depends on the laws in your state.
Consider Credit Counseling
If you are having credit card trouble, consider utilizing a nonprofit credit counseling agency like InCharge Debt Solutions. InCharge has credit counselors who can help reduce your monthly payments and get you out of debt even faster. With a debt management program, counselors can work with the credit card company to reduce the interest rate on your debt to 8% (sometimes better) and arrange a payment schedule that is affordable. It’s usually win-win and agreeable to both parties. The credit card company is under no obligation to agree to this arrangement, but it might view this good-faith effort as the best possible option.
- Pyles, S. (2019, February 13) Sued for Debt? Here’s What to Expect. Retrieved from https://www.nerdwallet.com/article/finance/sued-for-debt-what-to-expect
- Detweiler, G. (2019, July 4) 7 Ways To Defend a Debt Collection Lawsuit. Retrieved from https://www.credit.com/blog/seven-ways-to-defend-a-debt-collection-lawsuit-62166/
- Luthi, B. (2018, December 7) What Happens When Your Credit Card Company Sues You? Retrieved from https://creditcards.usnews.com/articles/what-happens-when-your-credit-card-company-sues-you
- Holmes, T. (2013, March 8) Taken to court for card debt? What to expect and how to respond. Retrieved from https://www.creditcards.com/credit-card-news/debt-court-expect-1282/