How to Defend Yourself in a Creditor Lawsuit

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parts

1Responding to the Lawsuit

2Resolving the Dispute out of Court

3Going to Court

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Tips and Warnings

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References

When you are behind on paying your debts, a creditor can sue you in court. If you lose, then the creditor can get a court judgment against you and possibly garnish your wages or put a lien on your property. In order to defend yourself, you need to understand common defenses to creditor lawsuits. You also should try to meet with a lawyer, who can provide advice tailored to your situation.

Steps

Part 1

Part 1 of 3:

Responding to the Lawsuit

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   Read the complaint. In order to start a lawsuit, the creditor will file a complaint in court. The complaint lays out the facts surrounding the lawsuit as well as the legal theories which allow the creditor to sue. You will be sent a copy of this complaint along with a summons. The summons should tell you how much time you have to respond to the lawsuit.
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   Meet with a lawyer. As soon as you receive your complaint and summons, you should immediately start planning your defense. In order to make the best case, you should try to meet with an attorney. You can get a referral from your local or state bar association, which should run a referral program.

   • You may be worried about how much an attorney costs. Realize that many people represent themselves in creditor lawsuits every day. Even if you choose to represent yourself, however, you should seek out low cost or free legal assistance.
   • There may be a legal aid organization near you. Legal aid organizations provide free legal help to people in financial need. To find one near you, search the Legal Services Corporation’s website at www.lsc.gov.
   • You can also meet for a consultation with an attorney. Most attorneys provide reduced-price or free consultations.
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   Gather relevant paperwork. Go through and find a copy of your loan contract. Also gather evidence of how much debt you have paid, such as cancelled checks or a monthly summary of account statement.

   • If you are being sued for an auto loan deficiency, then you should find your copies of all notices sent by the lender. The lender should have given you notices before selling the car as well as a notice of sale after selling the repossessed car. You will want to look through these notices for errors.
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   Check if the statute of limitations has passed. One way you can defend yourself is to argue that the creditor has waited too long to sue. Count how much time has passed from the last payment you made.

   • To find the statute of limitations, search “debt collection statute of limitations” and then “your state” on the Internet.
   • If the creditor waited too long to sue, you can raise a statute of limitations defense and get the case thrown out of court.
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   Identify procedural defects as defenses. You have other defenses you can raise as well. For example, you can argue that the creditor did not follow proper procedures:

   • The service of the complaint was faulty. Your state law will lay out how the creditor must serve you with the summons and a copy of the complaint. For example, in New York, the creditor must first try to serve you in person or else leave it with someone in your home while also mailing you a second copy. It cannot simply leave the documents with your next-door neighbor or mail it to you. If the creditor improperly served the paperwork, then you should raise this defense in your answer.
   • Defective notice (automobile cases). Under your state law, the creditor for a car loan must give you notice before selling the repossessed car. These notices must contain certain information. See Defend Yourself in a Car Repossession Deficiency Claim for more information. If the creditor fails to provide this notice, you should alert the court.
   • The collateral was not sold in a commercially reasonable manner (automobile cases). If a creditor sells a repossessed car, it must do so in a “commercially reasonable manner.” This is a fact-specific inquiry, but generally it means the seller must advertise and try to get the full value for the vehicle. If the seller sells to family or friends, or junks the car without getting an appraisal, you can challenge the creditor’s claim against you.
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   Find factual errors in the complaint. You can also defend yourself by arguing that the information in the plaintiff’s complaint is wrong:

   • You did not incur the debt. For example, if you were the victim of identity theft, then you can raise that as a defense. You are not responsible for loans someone took out while impersonating you. To strengthen your case, you should get a copy of the police report you filed when you first learned that you were the potential victim of identity theft.
   • You actually paid the debt. If you have paid the debt, then you can raise that as a defense. The creditor’s record-keeping might be so bad that it has not properly awarded you credit for payment. Find cancelled checks or other evidence of payment.
   • The amount you are sued for is inaccurate. The creditor might have calculated the amount of debt wrong. The creditor must come into court and show, using evidence, how much you owe and how the debt amount was calculated.
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   Draft your answer. You respond to the complaint by filing an answer with the court. In the answer, you respond to each allegation made by the plaintiff. Your court should have a printed “fill in the blank” answer form for you to use. Stop in and ask the court clerk.

   • You should also raise your defenses in the answer. For example, if the lender’s notices were deficient or if service of process was faulty, then you can state that in your answer.
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   File your answer. Once you have completed your answer, you should make several copies. Take the original and the copies to the court where the plaintiff filed suit. Ask the court clerk to file your answer. The clerk should also date stamp all of your copies.

   • You may have to pay a filing fee, which will vary by court. Ask the court clerk for the amount and acceptable methods of payment.
   • You will probably have to provide the creditor with a copy of your answer. Ask the court clerk for what methods of service are acceptable. Generally, you can either mail your copy of the answer or have someone personally serve it on the creditor. The server can be anyone 18 or older who is not a party to the lawsuit.
   • If the creditor has an attorney, then serve the copy of the answer on the attorney.
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   Participate in discovery. After you file an answer, the lawsuit enters a fact-finding phase called “discovery.” During discovery, you have the right to request documents in the creditor’s possession or to ask the creditor questions (in writing or by orally questioning an employee). The discovery in a creditor’s lawsuit might be limited, since most of the evidence (such as the loan contract) should be in each party’s possession already.

   • You can request any documents from the creditor that you think would be helpful. For example, you might have kept terrible financial records. You could request that the creditor provide you with copies of all loan documents, as well as a schedule of your payments.
   • If you are in small claims court, then you might have only limited discovery. For example, you might only be able to ask for documents but not be able to ask questions orally in a deposition.
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Part 2

Part 2 of 3:

Resolving the Dispute out of Court

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   Calculate how much you can afford. Before trying to negotiate a settlement, you should figure out how much you can pay toward the debt. You won’t do yourself any favors if you go through the negotiation process but still can’t make payments. Accordingly, you need to calculate what you can afford to pay before contacting the creditor to negotiate.

   • Total up your monthly expenses—housing, childcare, medical expenses, transportation costs, food, etc. Then add up your household income from all sources.
   • Cut any expenses that are not absolutely necessary. For example, your entertainment budget could be cut.
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   Negotiate with the creditor. You can try to negotiate with the creditor to reduce the amount owed. Realize that you do not have a right to negotiate. The creditor can always refuse. However, you might want to call the creditor and ask if it would consider negotiating with you.

   • One thing you can mention is that you are thinking about filing for bankruptcy. In a bankruptcy, you can discharge most unsecured credit, such as credit card debt. If you mention that you are thinking of bankruptcy, then the creditor might feel motivated to negotiate a settlement with you.
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   Try to only pay 50% of the debt owed. Ideally, you should aim to pay only 30-50%. Keep making counteroffers until you get the creditor down to that level. To begin, make an opening offer to pay 15% of the balance you owe.

   • You might have less luck negotiating with a secured creditor. A secured creditor is someone whose loan is backed by collateral which it can recover if you default on the debt. For example, a mortgage is backed by the house you bought, and a car loan is backed by the car you purchased. If a large bank holds your mortgage, then negotiating with them could be a waste of time, as the bank may require that you fill out endless paperwork before ultimately rejecting your home loan modification application.
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   Offer to make a lump sum payment in cash. A creditor might be more willing to settle a debt if you are prepared to pay in cash in one lump sum. Let the creditor know that you have cash available and are willing to settle.

   • By taking the cash now, the creditor can wash its hands of you. If it rejects your offer, it must continue on with the lawsuit, which can be time consuming.
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   Seek mediation. Depending on how willing your creditor is to negotiate, you might want to consider mediation. Mediation is a form of “assisted” or “guided” settlement negotiations. The person assisting is the mediator, a neutral third party who listens to the dispute and helps the parties reach a mutually acceptable resolution.

   • Mediation is typically voluntary, so there is little risk for giving it a chance. To find mediators, you can stop by your local courthouse to see if they run a mediation program. If they don’t, then contact your local or state bar association.
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   Get settlement agreements in writing. If you and the creditor are able to come to an agreement, then make sure to get the agreement in writing. If you fail to get it in writing, then the creditor might turn around and claim never to have reached a settlement with you.
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Part 3

Part 3 of 3:

Going to Court

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   Arrive early to trial. On the day of your trial, you should plan on getting to the courthouse with at least a half hour to spare. You need to find parking and go through any security.

   • Before entering court, make sure your cell phone and other electronic devices have been turned off. You don’t want them making noise in the courtroom.
   • If you don’t know how to dress, then see Dress for a Court Hearing for tips on what a judge expects you to wear.
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   Pick a jury. If you are sued in small claims court, then you probably will not have a jury. However, if you are sued in regular civil court, then you should have the option of having a jury hear the case. The jury selection process is called “voir dire.”

   • During voir dire, the judge will ask the jurors basic questions about whether they can be fair and how much they know about your lawsuit. If someone knows you personally or can’t be fair, then you can ask the judge to excuse the juror for cause.
   • You also might have a certain number of “peremptory challenges.” You can use a peremptory challenge to remove a prospective juror from the panel without giving a reason (unless the other party claims that you are motivated by racial or gender bias in your exercise of these challenges). For example, you might want to use a peremptory challenge to remove anyone who works for a bank or other financial institution.
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   Make an opening statement. The trial begins with each party making an opening statement to the jury. You should focus on telling the jury what evidence you will introduce and what the evidence proves.

   • For example, you might be defending yourself by claiming that you made payment: “And you’ll see the cancelled checks which the plaintiff cashed on January 2, 2015, but which were not credited to the defendant’s account.”
   • You cannot make an argument in your opening statement. You cannot say, “And for that reason I should win this lawsuit.” Just stick to the facts.
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   Testify on your own behalf. You may have to testify at trial. If you have a lawyer, then the lawyer will ask you questions. If you are representing yourself, then you might be able to read your testimony to the jury before having the creditor cross-examine you.

   • To be an effective witness, remember the following tips:
     • Avoid speculation or guessing. If you don’t know the answer to a question, then state, “I’m not sure” or “I don’t know.”
     • Answer only the question asked. You shouldn’t volunteer information. Listen closely to the question and answer only that question.
     • Speak clearly. Look at the jury as you answer and try to make eye contact.
     • Always remain calm. If you become angry, then the jury might not find you credible.
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   Make a closing argument. When all evidence has been submitted, you and the creditor get to make a closing argument. Your goal should be to convince the jury that the creditor has not proved that you owe the amount of money claimed.

   • Be sure to mention specific pieces of evidence that prove your point. For example, you could state, “The cancelled checks I showed you. Do you remember whose name was printed on the back? Keith Smith’s. And you heard from Keith Smith, who is the accounts manager for Acme Bank. He testified that he never received the check. But we have his signature on it. So the bank clearly received the check.”
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   Wait for the jury’s verdict. After closing arguments, the judge will read the instructions to the jury, who will retire to deliberate. In small claims court, the judge will issue a ruling from the bench.
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   Appeal, if necessary. If you lose at trial, you have the option of bringing an appeal. Appeals can be time-consuming and costly. You will definitely need a lawyer, since appeals require technical knowledge of legal procedure.

   • If you want to appeal, then you should quickly meet with a lawyer to discuss your options. You might have a limited amount of time to file your Notice of Appeal. In some states, you may have only 10 days from the day final judgment is entered against you.
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Tips

• You can always file for bankruptcy. This solution is not ideal. A bankruptcy will stay on your credit history for up to 10 years. However, if you cannot successfully negotiate a settlement, then you should meet with a bankruptcy attorney to discuss your options.
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Warnings

• If you want to negotiate with your creditor, you should avoid using a debt negotiation firm. These firms typically charge high fees. Instead, you should contact a legitimate credit counseling agency. To find a legitimate credit counseling agency, you can check with your nearest university, credit union, or housing authority.
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