If you’ve fallen behind on credit card, mortgage, or other payments on debt, it’s easy and natural to ignore the problem. This is particularly true if you don’t currently have the money to pay off the debt. You might be thinking if you just wait and ignore the collection calls, eventually you will have the funds to pay off the debt.
That strategy does buy you time, but at the expense of interest accruing and of stress. And, unfortunately, eventually the creditor usually gets fed up and takes a more aggressive approach: filing a lawsuit to collect the debt. Getting sued can be an overwhelming experience especially when it’s the first lawsuit you’ve been involved in.
If a creditor has filed a lawsuit against you to collect a debt, you should contact an attorney to discuss your options as soon as possible. When you are sued, you must respond to the complaint (the lawsuit) within a short period of time. In debt collection cases, you typically have two options: defend against the case immediately and directly or file for bankruptcy.
The fact that a lawsuit has been filed against you to collect a debt does not prevent you from filing an otherwise valid bankruptcy action. In fact, it may be a sign that you should consider filing for bankruptcy. If you do decide to file for bankruptcy, the form of bankruptcy, Chapter 7, Chapter 11, or Chapter 13 that you file will have some impact on the applicable rules.
Under all forms of bankruptcy, you will receive an “automatic stay” pursuant to 11 U.S.C. §362 that will temporarily prevent the creditor from attempting to recover the debt from you. This means, there will be a temporary halt to the lawsuit proceedings.
Once the automatic stay is in place a few things might happen. The creditor could ask the court for relief from the automatic stay allowing them to continue the court case against you during the pendency of the lawsuit. Relief from the stay is only available in limited circumstances. More likely, the creditor will file a claim with the bankruptcy court based on the amount it says you owe. If you don’t agree with the claim, you will have the opportunity to oppose it and raise defenses like you would in a court case.
At the end of the bankruptcy proceedings, the amount of the debt (assuming it was unsecured) that was not paid off through liquidation or reorganization will usually be discharged, meaning the creditor cannot pursue you for the remainder of the debt. However, there are a number of exceptions to discharge that allow a creditor to continue to pursue recovery of the remainder of the debt after the bankruptcy proceedings. Some of these exceptions, like tax debts and certain student loan debt, are listed specifically in the bankruptcy code and will automatically be exempt for discharge. There are also exceptions that a creditor will have to apply for, like if the debt was procured by fraud. For these specific exceptions, the creditor only has a limited number of days from the first meeting of creditors to ask the court that its debt be exempted from the bankruptcy discharge. If they obtain the exemption they may be able to continue the lawsuit against you after the close of bankruptcy proceedings.
If you’ve been sued by a creditor trying to collect a debt, the best response depends on your particular situation including the amount and your overall debt. A bankruptcy attorney with the Adam Law Group based in Jacksonville, Florida can help you determine the best course of action and whether bankruptcy is a prudent option.