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How to Collect Debt Through a Lawsuit

Becoming a judgment creditor

If you are a creditor seeking to collect unpaid debts, you have various collection options at your disposal.  

Often, creditors can successfully collect without taking legal action against the debtor. Lawsuits are a last resort. 

Whether or not you sue, it’s important to do everything you can to collect before suing.  

“Usually, by the time you’re contemplating a lawsuit to collect on an unpaid invoice, you’re already behind the eight ball,” says Wisconsin creditors’ rights attorney Seth E. Dizard. 

This doesn’t mean a lawsuit won’t be successful. However, it does underscore the importance of proactively trying other collection options and seeking legal advice sooner rather than later. 

“The time to go see your dentist is when your tooth starts to hurt, not when it has to be pulled out. It’s the same with going to see a lawyer. If you’re not sure you should, you probably should,” says Dizard. 

This article will cover the general steps in a lawsuit against a debtor and the other options creditors have before this last resort.  

Lawsuits are complex and can be time-consuming. If you’re a small business owner, a lawsuit can become a significant distraction from your actual business. 

Getting an experienced lawyer to strategize and lead you through the process will take enormous stress off your shoulders and help ensure the best outcome for your case. 

When Debt Collection Becomes Necessary 

There are many different types of consumer debt, including: 

  • Mortgages 
  • Car loans 
  • Medical debt 
  • Credit card debt 
  • Student loans 
  • Other purchases and loans 

Corresponding to the different types of debt, there are many different types of creditors, including banks, healthcare providers, credit card companies, student loan holders, and retailers. 

Debt collection efforts become necessary when individuals or businesses fall behind or default on their payments.  

There are different reasons why a debtor might not be making payments.  

Sometimes, late payments are accidental, and the debtor simply needs a reminder. Some debtors may have fallen into legitimate financial difficulties and cannot pay at the moment. Other debtors may be avoiding payment or have no intention of ever paying. 

As a creditor, figuring out the debtor’s situation will help inform your collection strategies.  

For example, for a debtor who is acting in good faith and hasn’t paid simply because they are experiencing financial hardship, you might be open to crafting a payment plan over a more extended period.  

You may need to take more aggressive measures for debtors who are avoiding payment. 

The steps you take will depend on the specific situation.

In any event, “You shouldn’t wait [to get a lawyer],” says Dizard. “If you’re a vendor, for example, and the party you’re contracted with is stringing you out and continues to make excuses, it’s so important to get a lawyer involved early on,” he says.  

A lawyer can “counsel you on whether it makes good business sense to give the party on the other side the breathing room they’re looking for—or to decide that you’re just getting strung along” and you need to take legal action. 

Options Before Filing a Lawsuit 

Before suing a debtor, a creditor has a few options: 

  • Direct collection. Creditors can try to collect directly by notifying the debtor. If emails and phone calls are ineffective, creditors might try sending a demand letter. 
  • Transfer the debt to a debt collector. If the creditor’s efforts at collection fail, they can transfer the debt to a debt collection agency. If successful, the debt collector will give the original creditor a percentage of what they collect, typically 50 percent. Getting something back is better than getting nothing back. However, because it involves a significant reduction, hiring a debt collection agency is often the last resort for creditors. 

Debt collectors must comply with the Fair Debt Collection Practices Act (FDCPA), a federal law prohibiting harassing, deceptive, or unfair practices in debt collection. 

If a debt collector does engage in such practices, debtors can demand that debt collector contact cease. If collectors persist in harassing or unfair behavior, debtors can report them to the Federal Trade Commission (FTC) or their state’s attorney general’s office.  

Additionally, the Consumer Financial Protection Bureau (CFPB) requires that when debt collectors initially contact debtors, they provide debtors with a written notice called a validation letter.  

The validation letter gives critical information about the debt being collected, including:  

  • The name of the creditor 
  • The agency’s contact information (phone number, mailing address) 
  • The amount of the debt 
  • The due date 
  • How to pay the debt 

A debt collector’s failure to follow these requirements can result in getting reported to the CFPB. 

How a Debt Collection Lawsuit Starts 

When a creditor or debt collector sues you, the general steps are:  

  • Complaint and summons. A lawsuit begins when a creditor or debt collector files a legal document called a complaint with the court. This document names the debtor as a defendant and explains why the creditor is suing and what they want. The summons is a document that notifies the defendant they are being sued and often explains how they can respond to the complaint. 
  • Answer. Defendants have a certain amount of time to give a formal answer to the creditor’s complaint. The amount of time a defendant has to respond varies by state, typically ranging from a couple of weeks to a month. Defendants will have to pay relevant court fees to file the answer. The answer is the defendant’s opportunity to reply to and contest the claims the creditor made in the complaint.  
  • Default judgment. Suppose you do not respond to the creditor’s complaint within the required timeframe. In that case, the creditor will obtain a default judgment against you, meaning you automatically lose your case. The creditor gets to seize your property in repayment of debt. If you don’t file an answer, you’re out of luck. It makes sense to give an answer to stay in the game and potentially achieve a better outcome. 

Next Steps in a Debt Collection Lawsuit 

Once a case begins, it may quickly go to trial, or there could be a more extended period called discovery.  

Discovery is the formal process by which parties gather evidence for their case.  

The evidence can come from the other party or third-party witnesses. Discovery can include various types of evidence gathering, including: 

  • Depositions 
  • Requests for the production of documents 
  • Subpoenas for witnesses to testify 
  • Other requests and information exchanges 

At any point in the pre-trial phase of a case, the creditor can petition the court for summary judgment.  

In a summary judgment petition, the creditor essentially says to the court that no facts are in dispute and that given those uncontested facts, the creditor should win as a matter of law.  

If the court grants summary judgment, the creditor wins. If the court denies it, the case progresses. 

Additionally, the parties may be uninterested in going through an entire case. In the interests of ending litigation, the parties might come together to negotiate a debt settlement

If the case does proceed to trial, the parties will present their evidence to the court. At the conclusion of the trial, the court will issue a decision.  

If the creditor wins, they become a “judgment creditor.” This means the creditor has a court order authorizing them to seize property from the debtor sufficient to cover the debt. 

With the help of local law enforcement or the sheriff’s office, a creditor might:  

  • Seize real property 
  • Take funds from a bank account 
  • Initiate wage garnishment 

If you’re planning to bring a lawsuit, it’s essential to understand your state’s laws governing court procedures. 

For example, you must comply with your state’s statute of limitations. A statute of limitations is a law setting the timeframe for plaintiffs to sue for something. If the plaintiff misses the deadline, they are barred from taking legal action.  

As a creditor, you don’t want to have a time-barred debt on your hands. Therefore, make sure you sue before time runs out. 

“There are all kinds of applicable statutes of limitations depending on what claims a potential client has,” says Dizard. “So, if you’re not sure, ask a lawyer.” 

What Does a Debtor-Creditor Rights Lawyer Do? 

The importance of getting a lawyer has been repeatedly emphasized throughout this article. So, what does a debtor-creditor rights lawyer do? 

“[My] practice is centered on financially distressed businesses,” says Dizard.  

“The decision-makers in those businesses, such as executives or owners, usually reach out to me in one of four ways,” he says. They are:  

  • “Their general counsel or outside counsel realizes that corporate insolvency is not their specialty and need specialized advice.” 
  • “The company’s financial advisor, working as a retained professional, tells the business leaders that they need to speak with a lawyer.” 
  • “An accountant tells leadership they need to speak with a lawyer.” 
  • “The business’s lender has said, perhaps in the context of a forbearance agreement, that the business needs insolvency counsel to talk about the business’s options” 

“Another aspect of my practice is that I often serve as a court-appointed receiver,” says Dizard. “Sometimes, I’m approached by the court directly and appointed just as a mediator would be.” 

“I’ve experienced acting as debtors’ counsel, lenders’ counsel, and as a receiver. I also represent companies interested in acquiring a distressed company’s assets, usually as a going concern,” he says.  

The takeaway for potential clients is that an experienced attorney can have several areas of expertise and practice. It’s important to find a lawyer in your area who will be able to provide you with the help you need.  

Questions for an Attorney 

Fortunately, many attorneys provide free consultations to prospective clients.  

Consultations allow the attorney to hear the facts of your case. These meetings also let you get legal advice and determine if the attorney or law firm meets your needs. 

To see whether an attorney is a good fit, ask informed questions such as: 

  • What are your attorney’s fees, and how do you bill your clients? 
  • What is your full range of legal services? 
  • Should I sue my debtor? 
  • Should we try to settle the debt before going to trial? 
  • What is the statute of limitations? 
  • How long will a lawsuit last? 

It is essential to approach the right type of attorney—someone who can give you legal help through your entire case. You can visit the Super Lawyers directory and use the search box to find a lawyer based on your legal issue or location.  

For legal assistance with collection issues, look for a collections attorney.

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