Delinquent Debt Lawsuit: What to Expect When a Creditor Sues You

By Cara O'Neill, Attorney
In most cases, a creditor must file a lawsuit and receive a court judgment before garnishing your wages, levying on your bank account, or seizing your property.

When you fall behind on a debt payment, you can expect creditor calls to start flooding in; but that's about all most creditors can do in the initial stages of the debt collection process unless the creditor is willing to take further action. Before withdrawing money out of your bank account, taking funds from your paycheck, or seizing your property, a lender must successfully sue you in court. You have options, however, because you can always stop a debt collection action by filing for bankruptcy—even after a lawsuit is underway.

Filing the Lawsuit and Obtaining a Judgment

If you don’t voluntarily pay all of your debt, or a lesser, negotiated amount, your creditor can file a lawsuit, prove that you owe the debt, and get a money judgment against you. The lender must secure a money judgment before using the following collection tools (the IRS, however, can collect without obtaining a judgment):

  • wage garnishment (your employer deducts a percentage of your wages from your paycheck)
  • bank levy (the bank surrenders the money in your bank account)
  • automobile, personal property, or real estate levy (the sheriff seizes your car; belongings, such as jewelry or other valuables; or your house, rental property, or land), and
  • till tap or keeper (the sheriff intercepts payments made to your business).

If you can defend against the lawsuit, you might prevail at trial and avoid a judgment. Most people don’t have a valid defense to assert against a creditor because, quite frankly, they owe the money. If you fall into this category and lose the suit, the creditor will get a judgment for the balance you owe. You might find yourself responsible for interest, attorneys’ fees, and court costs, as well.

You can expect a creditor to seek a wage garnishment, bank levy, till tap, or keeper before seizing your property. Not only are property levies more expensive and complicated to execute, but the creditor must pay any outstanding mortgage or car loan before receiving any money. It would be wrong to assume a lender wouldn’t seize your property, however, especially if you have substantial equity in the property, or own it free and clear.

The creditor can (and likely will) file the judgment with the county recorder’s office. Doing so will create a “lien” on your house or other real property. After you sell the property, the escrow officer will pay the judgment out of the sale proceeds, with interest.

Creditors Can’t Collect If You’re Judgment Proof

Most lenders determine whether you have money or property a judgment can reach before paying an attorney to file a lawsuit. If you don’t have collectible assets, you’re considered “judgment proof” and it will be less likely that the creditor will pursue an action.

Example 1. Creditor filed a collection lawsuit against Mr. Rich. After winning at trial, the court issued Creditor a $50,000 judgment, and, because Mr. Rich wasn’t judgment proof, Creditor received $27,000 from a one-time bank account levy and $1,500 per month from a wage garnishment until the judgment was fully satisfied (paid).

Example 2. Creditor filed a collection lawsuit against Ms. Poor. Creditor automatically won by default when Ms. Poor didn’t respond to the suit. Creditor used the default judgment to levy against Ms. Poor’s bank account and received $5. Creditor didn’t receive wage garnishment funds because Ms. Poor had been laid off. Ms. Poor was judgment proof.

Keep in mind that if you owe enough money, a creditor might litigate the matter even if you’re judgment proof. Creditors understand that your financial condition could improve, and, if it doesn’t, the creditor could realize a profit by selling the judgment to another debt collector.

(If you aren’t sure whether you’re judgment proof, read What It Means to Be Judgment Proof: Your Creditors Can’t Collect From You.)

Filing for Bankruptcy

An effective way to stop a creditor lawsuit is to file for bankruptcy. Creditors must cease all collection activity, including proceeding against you in state court, as soon as you file a bankruptcy case. It’s important to understand that in most (if not all) cases, you’ll stand a better chance of wiping out (discharging) your debt if you file for bankruptcy before the state court issues a money judgment. You should be aware, however, that you might have other pressing issues that will affect the timing of your bankruptcy.

If you’re unsure about your options, you should seek professional advice. A bankruptcy attorney can review your case and determine whether filing for Chapter 7 bankruptcy or Chapter 13 bankruptcy will meet you particular needs.

Questions for Your Attorney

  • Are my assets vulnerable to a debt collection action or am I judgment proof?
  • Which bankruptcy chapter will be best for me?
  • Should I file for bankruptcy before or after the state court issues a judgment in a collection action?
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