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What Happens When Your Credit Card Company Sues You?

Ignoring debt collection calls usually doesn’t make them go away. Ignore your credit card debt long enough, and your credit card company may sell your account to a collection agency or sue you in civil court for the balance. While it’s best to try to work with your credit card company before a lawsuit is filed, it’s also important to know what to expect if you receive a summons and how you can respond to it.

What to Expect When Your Credit Card Company Sues You

When your card issuer — or a collection agency that has purchased your debt from the issuer — can’t get you to pay your bill, a lawsuit seeks to obtain a court judgment, which may give the company the right to garnish your wages and bank account until the debt is paid.

[Read: Best Credit Cards for Bad Credit.]

In most cases, you don’t have to worry about going to jail over your credit card debt. “We don’t have debtors prisons anymore,” says Ashley F. Morgan, a Virginia-based bankruptcy attorney at Ashley F. Morgan Law. “But if you don’t respond to a court order appropriately, you can be in contempt, and that can put you into jail.”

For example, if you fail to follow a court order to appear or to make a payment, you can be held in civil contempt of court, and the court can issue a warrant for your arrest.

The credit card company may not initiate a lawsuit as soon as you default on a debt. Morgan says creditors may try to collect debts for up to a year and a half before they sue. But she has also seen some companies notify customers of a lawsuit after as little as six months.

One factor that can influence the timing is the statute of limitations in your state. Some states allow creditors to sue over an unpaid debt for up to 15 years, while others permit it for three years.

If your credit card company or a debt collector notifies you of a lawsuit with the service of a summons and complaint, you will typically have up to 30 days to respond. If you don’t, the court could grant a default judgment, which means the court automatically rules in favor of the card issuer or debt collector and enforces its request to garnish your wages or bank account.

A word of caution: Even if you respond to the lawsuit, the court could still grant a judgment. But if you respond, you have the opportunity to present your side of the case, and your arguments could affect the outcome.

How to Respond to the Lawsuit

First, verify the debt. While your liability should be clear if your credit card company sues you directly, sometimes it’s not that straightforward. Debt collectors you’ve never heard of can purchase your debt and sue you for it, and the debt may be inflated by fees and penalties. Mistakes or outright fraud can happen. So even if you know you owe the debt, request documentation of it if you’re being sued by a debt collector.

The federal Fair Debt Collection Practices Act provides the right to request verification of a debt, but you must put your request in writing — and send it, ideally, by certified mail. The debt collector will be required to produce a copy of the original written agreement between you and the credit card company and proof that it has been assigned the debt. If these documents can’t be produced, you can ask to have the lawsuit dismissed, and you may have the right to countersue for failure to verify the debt.

Once you’ve verified the debt, you can weigh your options. Here are some potential responses:

Request a settlement. Allowing the lawsuit to go to trial can be expensive for you and for the credit card company. “My experience has been that (credit card companies) realize the cost of going to trial,” says Bob Dremluk, a New York-based bankruptcy attorney with Culhane Meadows, “and they’re willing to settle for lesser amounts to save the cost of litigation.”

You can request a settlement by contacting the credit card company directly. The amount of the settlement can vary based on the company and your ability to pay, and it can be either a lump-sum payment or an installment plan, depending on the creditor.

[Read: Best Secured Credit Cards.]

Keep in mind that whatever settlement you agree on, you’ll need to make good on it. Otherwise, the company may decide to proceed with the lawsuit. If you’re short on cash, getting a loan to bridge the gap may be out of the question, especially if your credit has been damaged by the delinquent account. Instead, Dremluk recommends asking a family member or a trusted friend for a short-term loan.

If you’re hesitant to pursue a settlement agreement on your own, consider enlisting a debt settlement company to negotiate on your behalf. Keep in mind, though, that these companies charge fees for their services, and they can’t guarantee any results. Because a summons puts you on a tight schedule, communicate with the debt settlement company about your situation, and talk to the credit card company about your desire to settle through a third-party company before proceeding.

Pay the full amount. Debt settlement may allow you to pay less than the full amount and avoid a lawsuit, but this can come with its own set of problems. If you settle for less than the full amount, the account may remain on your credit report for up to seven years as a derogatory mark. The IRS may consider the settled portion of your debt income and require you to pay taxes on it.

Pay the entire amount and the account will be resolved, the lawsuit will no longer be necessary, and your credit report will reflect that the account was paid in full, which is not a derogatory mark. However, if you’ve reached the point of a lawsuit, you likely have months, possibly years, of missed payments, which are derogatory marks. The derogatory mark that can result from debt settlement may not make much of a difference for your credit rating, so paying an account in full to preserve your credit rating might not be worth it.

Enter into a debt management plan. You may be able to work with a credit counselor to get on a debt management plan. With this option, you’ll make monthly payments to the credit counseling agency, which will, in turn, pay the credit card company. The credit card company or debt collector will have to agree to withdraw the lawsuit and allow you to follow the debt management plan. Creditors may be willing to work with credit counseling agencies because they can obtain payments from customers — the same outcome they were trying to achieve with a lawsuit.

As with a debt settlement company, time is of the essence. Make sure the credit card company agrees to the debt management plan before the clock runs out on the summons. Otherwise, you could end up with a default judgment.

Declare bankruptcy. While you might consider bankruptcy a last resort, it may be worth thinking about if the alternative is wage garnishment. Talk to a bankruptcy attorney about the process and the consequences of declaring bankruptcy. If you decide to go through with it, be sure to file before the court enters a judgment. Otherwise, you may not be able to include the debt.

Before you proceed, though, note that a bankruptcy can linger on your credit report for as long as 10 years, whereas the consumer credit bureaus no longer include civil judgments on your credit report. So if you have the means to either settle or pay a judgment, your credit will typically recover more quickly than if you were to opt for bankruptcy.

Fight the lawsuit. If you think you can win and you go this route, you will need to decide whether you want to hire a lawyer or represent yourself.

“It’s definitely worth talking to a lawyer if you can get a free consultation,” Morgan says. “But if you have a $2,000 debt, it may not be worth paying a lawyer $500 to $1,000 to defend it.” She adds, however, that some legal aid groups offer free representation to low-income defendants.

Here’s what can help your case if it goes to trial:

The statute of limitations ran out. If you have a record of when you made your last payment on the account, you can use it to prove that the debt is considered “time-barred.” Make sure it’s really your most recent payment, though, because the credit card company will have records of its own that it can present.

You weren’t properly notified. Credit card companies should act in good faith by sending you notices of what you owe. But if you didn’t receive them — they were delivered to the wrong person, or the company couldn’t find you — you may be able to argue that the lawsuit is unfair.

You don’t actually owe the debt. If you have proof that you paid the debt or you don’t recognize it, you can send a debt verification letter to the credit card company to confirm that the debt belongs to you and that the company owns the debt. Send your letter via certified mail, so you have proof of when the letter was mailed and received. If you find a discrepancy between records or the account is fraudulent, you can dispute the lawsuit.

[Read: Best Credit Cards for Fair Credit.]

You may be able to bring your own lawsuit to the table if you believe the credit card company or debt collector violated your consumer rights. The Fair Debt Collection Practices Act is clear about what debt collectors are and aren’t allowed to do when trying to collect a debt.

The purpose of the law, Dremluk says, is to eliminate abuse and protect legitimate efforts to collect a debt. For example, the collector can’t make threats or call you too early or too late. The collector also can’t discuss the debt with anyone but you and your spouse. “If you’re represented by an attorney, then the only communication from a debt collector can be with the attorney,” Dremluk says.

Know your consumer rights so you can spot abusive practices when they happen.

Rebuilding Credit After Debt Settlement

Dealing with a lawsuit from your credit card company can be a stressful experience. Regardless of how you respond to the suit, it will take time for your credit to recover. If your debt problems arose from issues with overspending, for instance, leave your credit cards at home until you can become more disciplined with them.

But if you think you can be responsible with credit, consider getting a secured credit card. As you use the card regularly and pay your bill on time each month, you can establish a positive payment history and work toward getting your credit back to where you want it to be.

More from U.S. News

How Should I Respond to a Debt Settlement Offer?

The Truth About Credit Card Debt Settlement

How to Rescue Your Credit With a Secured Card

What Happens When Your Credit Card Company Sues You? originally appeared on usnews.com



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