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Creditor Lawsuits Creditor Lawsuits

Will You Be Sued?

First the bad news: some people receive debt collector lawsuits from creditors who are attempting to recover a debt. If that suit is successful for the collector, a judgment is entered, and the creditor can enforce that credit lawsuit by garnishing wages, putting liens on property, and even taking money out of your bank account.

But here's the good news: in our experience, only about 20% of accounts receive lawsuits. In fact, one of our partners reports that only 6% of its clients are sued by original creditors or debt-buyers.

And here's the better news. Say you are sued: if you understand your rights, know how the system works, and get help when you need it, in most cases you can make it too difficult or expensive for the creditors to win and you may eventually get the case dropped.

Here's why.

98% of the time when a creditor sues a debtor, one of two things happens:

  1. The debtor buries his or her head in the sand and doesn't respond to the lawsuit and the creditor gets a judgment by default; or
  2. The debtor shows up in court and tells the judge some sad story about how they got into their present situation. However, all the judge cares about is whether the account is theirs and whether they made the charges. The debtor says, "Yes, but..." and the judge again rules in favor of the creditor.

Remember, suing someone is the most expensive collection effort a creditor can pursue. Even if they get a judgment, they still have to enforce that judgment and there is no guarantee they will be able to collect anything at the end of the day. As a group, those who can't make minimum payments to their creditors don't have a lot of assets to collect on.

Even the worst attorneys—and believe me, collection attorneys are the worst—still bill at least a couple hundred dollars per hour for their time.

So let's look at this from the creditor's perspective:

  • They most likely purchased your account for pennies on the dollar.
  • They are used to winning the vast majority of their lawsuits by default.
  • Enforcing these judgments costs even more time and money with no guarantee for return.

As long as creditors are making money by suing debtors they will continue to do so.

However, if you know your rights and respond to the creditor lawsuit with requests for discovery (interrogatories, admissions, etc.), you throw a wrench in their business model. In order to pursue the suit, they have to keep spending more and more money and pretty soon their theoretical profit margin disappears and they start losing real money.

Furthermore, the more work you throw at these bottom-feeding collection attorneys, the more likely it is that they will mess up somehow, allowing you to have the case dismissed!

Let's start with original creditors. (An original creditor is the company that first offered you credit. For example, if you apply for and receive an HSBC credit card, HSBC is the original creditor.) Some original creditors are much more likely to sue in order to recover a debt than others. As you know, if you have not made a payment on a credit card debt for 180 days, the original creditor will discharge or write off that debt. The original creditor will then either assign the debt to a collector who collects on their behalf, or sell your account outright to a third-party debt collector—usually for around 10 cents on the dollar.

Whether the debt is assigned or sold actually makes a difference when it comes to a debt collection lawsuit. That's because debt-buyers are less likely to have the supporting documentation you are going to demand they produce as part of the court proceedings. Oftentimes, a debt-buyer—also known as a third-party debt collector—will simply purchase a database with your name, the account number, and how much you allegedly owe.

Notice the word allegedly in the previous sentence? "Allegedly" is an important concept you must understand when it comes to debt collection lawsuits. You are innocent until proven guilty. The burden of proof is on the creditor to prove that you owe them money, not for you to prove that you don't. They are the ones alleging that you owe them money. In responding to a creditor lawsuit you are in effect saying, "I am unsure whether or not I owe XYZ Collections any money. Therefore, I need XYZ collections Company to prove it to me and to the court." Otherwise, anyone could sue anybody for any reason and win!

Original creditors are a bit more tenacious when it comes to debt collection lawsuits for a couple of reasons. First, they have access to all the information regarding your account, including your signed agreement and billing statements. Second, they have a lot more invested in your account. A third-party debt collector may have spent only 10 cents on the dollar for your account, while the original creditor is out almost the entire amount of the account.

While there are certainly no guarantees, and no way to accurately predict your likelihood of being sued by an original creditor, our experience—and the experience of our partners—does allow us to make a few assumptions:

  • Citibank is fairly likely to file a credit lawsuit to recover debt
  • Discover is fairly likely to file a credit lawsuit to recover debt
  • Chase is very likely to file a credit lawsuit *
  • Credit unions are more likely to file a credit lawsuit as well

On the other hand:

  • Bank of America does not tend to file a credit lawsuit to recover credit card debt
  • Wells Fargo does not tend to file a credit lawsuit
  • HSBC does not tend to file a credit lawsuit
  • Companies who provide "store" cards underwritten by HSBC (like Target, Home Depot, etc.) do not tend to file a credit lawsuit

Those original creditors less likely to sue tend to sell off their debts to debt-buyers. Some debt-buyers may eventually sue, but most won't for reasons already mentioned above.

On a related note: whether or not you'll be sued also sometimes depends—believe it or not—on where you live. You are more likely to be sued if you live in a major metropolitan area than if you live in a fairly isolated rural area. The reason is simple: big cities have more lawyers and law firms. For example, in Michigan, three major law firms tend to handle most debt litigation matters. In other states, like Wyoming, one firm gets the bulk of that work. So if you stop making payments on multiple cards and you live in Michigan, it is likely that different firms would have to find and sue you; whereas, if you live in Wyoming, one firm may be serving you with multiple creditor lawsuits.

As a rule of thumb, if you live in a predominately rural state and you get one lawsuit, you're likely to get more. The flip-side is that, if you don't get one suit in a rural area, you probably won't get any.

Also keep in mind that if you receive a letter from a law firm threatening a creditor lawsuit, and that law firm is located outside your state, the odds are the letter is a bluff. In order to file a lawsuit, a law firm must be in your state. The law firm could choose to hire a local firm to pursue the debt litigation, but that doesn't happen particularly often.

Back to third-party debt collectors. Instead of suing right away, most start by playing a numbers game. Debt collection agencies buy debts in bulk for pennies on the dollar and start by using the least expensive tactics possible to collect those debts—such as sending letters and making phone calls. Occasionally they ramp up their efforts by making threats, but in most cases they finally decide further effort isn't worth their trouble. As long as they collect on a certain percentage of the debts they buy, they're happy. Debt collectors don't have to collect every debt in order to make a great living, they just need to collect on a certain percentage of the low-hanging fruit.

Once debt collection agencies decide further effort doesn't make sense, they sell your debt to another collector—or just stop trying altogether. Oh, they might send an occasional letter in hopes you'll finally cave, but most debt-buyers assume if they aren't successful within the first six to eighteen months or so, they might as well give up. It is simply a business reality of diminishing returns.

Eventually the statute of limitations runs out on the debt, and it is considered a time-barred debt and uncollectable by debt collection laws. If you were to receive a summons after your statute of limitations had expired, all you would need to do would be submit your state statute along with a copy of your credit report (showing the date of your last payment) to get the case dismissed.

So let's say you get a credit lawsuit before your state's statute of limitations expires. What next?

* In the past Chase used the National Arbitration Forum (NAF) to win arbitrations and then have that result turned into a judgment. In July of 2009, however, the Attorney General of Minnesota forced the NAF to cease operations because of extensive financial ties that were found between the NAF and the debt collection industry. This may mean that we will see Chase suits drop dramatically in the future. Stay tuned.

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