What to Do if Your Lender Files a Lawsuit Against Your Business[yoast-breadcrumb]
Lender Files a Lawsuit Against Your Business
Getting sued is scary; no one wants to find themselves in court defending against legal claims. But when a lender files a lawsuit against your business, it doesn’t necessarily mean disaster. With some preparation and knowledge, you can get through it.
Why Would a Lender Sue?
There are a few common reasons a lender might file a lawsuit:
- You defaulted on the loan – If you failed to make payments as agreed, the lender can sue to recover the money owed.
- You breached the loan terms – Even if you didn’t default, violating other terms of the loan agreement gives the lender grounds to sue.
- Fraud – If the lender believes you misrepresented information to get the loan, they may sue for fraud.
- Foreclosure – If you used real estate as collateral for the loan, defaulting could trigger foreclosure via a lawsuit.
Lawsuits from lenders usually seek payment of the debt, seizure of collateral, or a judgment that lets them garnish wages or put liens on property. Needless to say, you want to avoid an outcome like that.
Steps to Take When Sued by a Lender
If you’ve been served with a summons and complaint from a lender, stay calm; then take these steps:
- Read everything carefully – The complaint should explain why the lender is suing and how much they seek in damages. Understanding their position is crucial.
- Meet deadlines – Lawsuits move fast, so calendar all deadlines for responding to the complaint, filing motions, etc. Missing deadlines can lead to default judgments against you.
- Consult a lawyer – An experienced business litigation attorney can assess your case and build the best defense.
- Negotiate – Your attorney may be able to negotiate a settlement agreement that satisfies the lender without a trial.
- Consider bankruptcy – If debts are overwhelming, bankruptcy may be an option to discharge them.
- Build your case – Gather evidence, line up witnesses, and work with your lawyer to refute the lender’s claims.
- Comply with rules – Follow all rules for preserving documents, participating in discovery, and getting ready for trial.
Possible Defenses Against Lender Lawsuits
The right defense depends on the specifics of your situation. Here are some potential defenses to think about:
Breach of Contract by the Lender
If the lender didn’t fulfill their obligations under the loan agreement, argue they breached first. This could release you from the contract. For example, if they wrongly denied you an extension after late payments due to a temporary hardship.
If loan terms were unfairly one-sided in the lender’s favor, that supports an unconscionability defense. This argues the agreement was so unjust it shouldn’t be enforced.
Duress or Undue Influence
If the lender pressured you into accepting loan terms you didn’t understand or couldn’t reasonably comply with, argue you signed under duress. This makes the agreement invalid.
If the lender misled you about key loan terms when signing, claim they fraudulently induced you to enter the contract. This may make it void.
Statute of Limitations
If too much time passed between loan default and the lender filing suit, the statute of limitations may have expired. This bars them from collecting.
Improper Notice of Default
Lenders must properly notify borrowers of default before accelerating a loan and suing. If notice was improper, they may lack grounds to foreclose.
If the lender acted unethically in relation to the loan, like misleading you or violating consumer protection laws, argue they come to court with “unclean hands.” This can overcome their claims.
Mediation and Settlement
Rather than go to trial, it may make sense to settle through mediation or direct negotiation with the lender. This lets you avoid the risk and expense of litigation. Settlement terms often involve:
- Agreeing to a repayment plan
- Surrendering collateral
- Paying part of what you owe as a lump sum
- Signing a promissory note for the balance
Having an experienced lawyer handle settlement talks is crucial to get the best possible terms.
What If You Lose?
Don’t assume all is lost if the court rules against you. There may still be options like:
- Asking the judge to alter or amend the judgment
- Appealing to a higher court
- Seeking a payment plan for the judgment
- Negotiating a settlement to avoid collection
- Filing for bankruptcy to discharge the judgment
An attorney can advise you on post-judgment relief to minimize the damage as much as possible.
Preventing Lawsuits from Lenders
They say an ounce of prevention is worth a pound of cure. To avoid getting sued in the first place:
- Vet lenders carefully and negotiate fair loan terms.
- Keep careful records of all loan documents and communications.
- Make payments on time every time.
- Don’t promise more collateral than you can spare.
- Manage business finances conservatively so you can weather hard times.
- Get professional help – Hire an accountant or bookkeeper to handle recordkeeping and ensure taxes and filings are done right.
- Build an emergency fund – Having cash reserves helps you ride out downturns without taking on debt.
- Purchase adequate insurance – Make sure you have solid business liability and property coverage.
- Monitor cash flow – Use accounting software to track income vs. expenses and manage cash needs.
- Watch industry trends – Stay on top of your market so you can adapt before threats materialize.
- Keep overhead low – Limit fixed costs so it’s easier to align expenses with revenue.
- Have a line of credit – Preapproved financing gives you access to cash quickly in a crunch.
- Diversify your customer base – Don’t rely too heavily on any one client or sector.
- Review contracts carefully – Vet agreements to avoid problem provisions that could trip you up later.
- Incorporate protective terms – Include clauses to limit risks like personal guarantees and blanket liens.
Staying financially fit makes your business resilient when faced with challenges like an economic slump or legal action from a lender. With prudent money management and caution in taking on debt, you can hopefully avoid the situation of being sued in the first place. But if it does happen, you’ll be better prepared to mount a strong defense.