Being sued by a creditor is one of the scarier things that can happen to a small business owner. You don’t go to debtors prison for having unpaid debts these days, but losing a lawsuit can lead to a judgment, and a judgment means the creditor will have some leverage to get their money back, like a lien on your property, wage garnishment, taking money from your bank account. Still, a summons is not the end of your business, and you have more rights than you might think.
Ultimately, if you don’t pay an account, it becomes delinquent and then in default. Once that happens, the company you owe the money to can come after you themselves or they can sell your debt to a collection agency. Then they can sell it again. And then any one of those people can sue you.
To start the process, the plaintiff’s lawyer will file a complaint in civil court. Then the business owner gets a summons. It has all the details: who is suing, any other defendants (say a cosigner), the total amount being claimed (including interest and fees and legal costs), the hearing date and how to file an answer to the complaint. Every state has different laws but this is the basic breakdown.
A summons is not a love note. Don’t ignore it. Before the deadline listed in the court papers, show up yourself or send a lawyer to show up for you. Because if you don’t do that, the judge will rule against you, and you’ll have to cough up the whole thing. This is called a default judgment. In some states, it can give the creditor the right to grab your wages, take money out of your bank account or put a lien on your property. You can’t win a case you don’t show up to.
First, confirm that the lawsuit is legit. Remember, big companies can make mistakes, and the amount of money you’re being sued for may be incorrect, especially if the debt was sold to a collection agency. You may have actually paid the debt and have a receipt for it. Or someone may have stolen your identity and made charges without your authorization or you may not have opened the account in the first place. (You can get a free credit report, which will tell you if an account was opened in your name.) If the account was discharged in a bankruptcy, that may be a defense as well.
Take a close look at the balance. If it’s been padded with penalties and late fees, those are often negotiable. Check your contract to see what fees can be tacked on when you’ve fallen behind, and if it sounds like they’re being made up as they go along, speak up.
Every state gives a time limit to file a civil lawsuit known as the “statute of limitations.” The limits are different from state to state. They start to run from the date of your last payment. If the creditor waited too long to file the case, it should be dismissed, but only if you go to court and tell the judge that the statute of limitations has run. It’s no good to you if you aren’t there to use it.
You are not the one on trial here. It’s the plaintiff who has to prove you owe them money. So make them do it. (Debts often get sold, so the plaintiff won’t necessarily be the company you originally owed money to.) Ask for proof that you signed a credit agreement, and that all the paperwork they’re waving around is accurate and came from the original creditor. Ask them to prove that every dollar they’re demanding is accounted for: That everything on your list of charges is accurate, that every fee they’re demanding is something you agreed to, and that the final balance they claim you owe is the right amount. You can do this yourself, without a lawyer. And if they can’t produce the documents, the lawsuit could be dismissed, or they might be willing to settle for a lesser amount.
The creditor is going to have an attorney. You might, too, especially if there’s a lot of money on the line or you don’t feel up to representing yourself. An attorney can help you determine whether the statute of limitations has run out and guide you through complicated situations. You can find one through referral services offered by your local or state bar association, and you can check whether complaints have been filed against them.
It might be worth it to defend yourself if you have kept good records of your case, believe the charges are inaccurate, and are comfortable speaking before a judge. It might also be worth it if the amount you owe is less than what you would pay in legal fees. Just remember: It is a process. You need to find out the deadline for responding from the court clerk, craft a written answer to each of the allegations, gather your evidence and prepare for trial.
Depending on the situation, it may not be too late to settle if you have been sued. The collector or the creditor may not be willing to negotiate right away, but the creditors and collectors often don’t like to spend money to hire a lawyer and go to court. They would want to recover as much money as they possibly can. If you offer to pay a certain amount, and tell them to drop the lawsuit and forgive the remainder, then you may be able to settle the debt. You should get the settlement terms in writing prior to sending any money, including the settlement amount, due date, if the lawsuit will be dismissed and how the creditor will report the account. Otherwise, the creditor may claim that your payment was just a payment and sue you again.
Of course, if you owe the money and can’t pay it, bankruptcy may be your best option. In which case all collection activity must cease while the bankruptcy is worked out. Bankruptcy is a big move with lasting consequences. It can take you years to recover. Talk to a lawyer as soon as you realize you can’t pay a debt. If you wait until the last moment before the hearing, you may have to file an emergency bankruptcy petition, which can be more expensive.
If the case ends up in court, one of three things can happen. You could win the case, in which case you might be able to go on the offensive and demand some damages to recoup your attorney’s fees. The judge might dismiss the case, and even though that would end the litigation, the creditor could refile, so it’s best to get a dismissal with prejudice, which means the case is closed forever. And then there’s the possibility that you could lose the case. If that happens, the creditor will get a judgment and ask the judge for the right to start collecting. That could mean your wages could be garnished, liens could be placed on your property or your property could be forced into a sale, depending on where you live.
It’s not good if someone’s sued you, but don’t panic. It’s most important that you respond within the timeframe given and confirm the claim is accurate, make the creditor prove their case, and decide on your action, whether it’s negotiating a settlement, fighting the suit, or hiring an attorney before the deadline. You still have rights, even if you owe the creditor a bundle.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
