Credit card lawsuits

Wow it’s been a long time since I’ve addressed debt collections. There really isn’t a whole lot to say, though. Things are pretty straightforward, and I often end up repeating myself whenever I respond to an article I’ve seen online. A lot of the articles tend to be written by people who have never been through collections, so there’s plenty of misinformation and wishful thinking in many of these articles.

Though the most egregious misinformation I’ve seen came from the United States government. Seriously. Egregious only because they, of all people, should’ve known better.

Lawsuits, though, tend to not get covered much when talking about debt collection. For one, collections lawsuits are not much different than any other breach of contract lawsuit. No, seriously, they aren’t. This also means that responding to one will be within the laws of your State of residence, and the rules of the applicable Court.

And unless you’re an attorney or you’ve actually been sued by one of your creditors, you really should NOT be trying to write about a collections lawsuit. And if you do, you’d better have your information verified by an attorney to make sure it’s accurate.

But over at US News and World Report, contributing writer Ben Luthi decided to take up the challenge. There is no indication on his profile that he has ever been through a lawsuit, let alone collections, nor is there any indication he’s a practicing debt or bankruptcy attorney. So no surprise, then, that the article he wrote has… issues. Meaning he definitely didn’t put his article back in front of the attorney he quoted in it.

Or otherwise she, hopefully, would’ve told him there’s no point in mentioning… jail.

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.

Once you’re served with a lawsuit, don’t ignore it. It won’t go away, it will lead to a default judgment if you try to ignore it, and things only get worse from there. The judgment is merely the Court ordering you to pay the amount owed to the creditor – called “monetary relief” in legal parlance. The specifics of that payment, including whether you lump sum pay it, or pay it off in installations, is between you and the creditor.

But if you refuse to pay on the judgment, will you be held in contempt of Court and put in jail? No. Instead the petitioner will seek enforcement through the Court via post-trial motions. Attempting to or actually interfering with that enforcement can get you thrown in jail.

Failing to appear for a civil court date, though, will also not result in being held in contempt. Civil cases are very, very different from criminal cases in which the government can compel you to appear, and arrest you if you don’t. The Court cannot compel you to appear on a civil court matter. You just automatically lose the case if you don’t appear as scheduled, and you also surrender any right of appeal when that happens. Unless your failure to appear is due to a very good reason.

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.

A credit card company cannot initiate a lawsuit as soon as they charge off the account. They have to exhaust all other options for collecting the balance before turning to the Court.

And I wonder if the “six months” means six months after the charge-off, meaning the account had actually been in default for 12 months. Under the FDIC policy known as the Uniform Retail Credit Classification and Account Management Policy, open-ended (“revolving”) credit accounts cannot be charged off sooner than 180 days delinquency. (65 FR 36903 at 36904, June 12, 2000)

In the case where one of my creditors sued me, they filed suit about 15 months after the account went delinquent, so about 9 months after it was charged off.

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.

By the time a lawsuit rolls around, it’s too late to validate the debt. And the Fair Debt Collection Practices Act offers no protection unless a debt collector filed the lawsuit before you had a chance to exercise your rights, since such isn’t allowed under Federal law.

The complaint will also include some evidence backing their claim, providing virtually everything they’d be required to provide for validation anyway, making validation a waste of effort. In a foreclosure lawsuit in which I was erroneously involved, the complaint I was served included a copy of the mortgage note. This showed that it was all a case of mistaken identity. More on that later.

And when I was served in a lawsuit by Capital One, that complaint also included a copy of the agreement I signed and the last credit card statement before the account was charged off into collections.

Now sure, a debt buyer can purchase the debt from the original creditor and sue you, though they must still act in good faith, meaning they can’t just sue you after they buy the debt. But with debt buyers, debt validation is not an enforceable option. The Supreme Court of the United States ruled that the Fair Debt Collection Practices Act applies only to debt collectors. Debt buyers are exempt from it. And original creditors are generally exempt from it as well since 15 USC § 1692g specifically mentions “debt collectors” (as defined at § 1692a) and doesn’t mention “creditor” (also as defined at the same).

But let’s say the lawsuit is being handled by an organization meeting the statutory definition of “debt collector”. Can you still validate the debt under the Fair Debt Collection Practices Act after they’ve filed a lawsuit and served you? Well you can try.

Disputing the debt under § 1692g only applies to the first communication from a debt collector. Which if they’ve filed a lawsuit, you are well past that stage unless they’re acting in bad faith and not giving you adequate notice so you can exercise your rights under Federal law. Now if you ignored the mailing, that’s on you.

So again, the Fair Debt Collection Practices Act doesn’t really apply at all once you’ve gotten to the lawsuit stage. Unless the petitioner is a debt collector. And you can show the petitioner has been acting in bad faith. But in general your relief will come under State law, not Federal law. If you want relief under Federal law, you must file a separate lawsuit in Federal Court.

Remember, once the lawsuit is filed and you’re served, everything now goes through the Court. So don’t miss your Court date.

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In general you should not try to fight the lawsuit unless you are certain you can beat the lawsuit. Instead try to negotiate a settlement or pay it in full before the first hearing. Then at that first hearing, inform the Court of the settlement or that the matter has already been resolved. There will be a follow-up hearing scheduled pending additional motions.

There are only three scenarios in which you should fight the lawsuit. And basically those are scenarios where you, under a rational interpretation of the law, cannot be held responsible for it. These are the three which Ben readily provides:

  1. The statute of limitations ran out.
  2. You weren’t properly notified of your obligations.
  3. You don’t actually owe the debt.

I’ve written before on the statute of limitations. His extra advice of making sure what you think is the last payment on the debt “really [is] your most recent payment” is spot on. I don’t think it’s been adjudicated through the Court whether the limitation applies only to payments you make, or whether it can also apply to payments made on your behalf – e.g. a gift payment by friend or family.

If the debt is time barred, you need to make that claim to the Court. It is an affirmative defense. You can’t just ignore the Court service.

And he’s also correct that creditors generally need to act in good faith with their customers and the obligations they have. They can’t just sue you out of the blue. What constitutes “bad faith” is going to vary on jurisdiction, but generally it means they weren’t doing what they could, within reason, to keep you informed about your obligations to them – balances, interest rates, fees, etc. This isn’t enough to get rid of the debt, but it could get a lawsuit dismissed without prejudice.

But what if 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.

Again, by the time you get served by the Court, validation isn’t an option.

Now there are three reasons you’re being served on a debt you don’t actually owe: mistaken identity, you’re paying the debt or have paid off the debt, or the account was fraudulent.

Mistaken identity

With mistaken identity, you need to file an affidavit with the Court asserting your identity and that you’re not the debtor they’re looking for. (And no, I’m not making a Star Wars meme from that.) The specifics on this are governed by the rules of the Court in question, so you’ll need to contact the Clerk for that Court to find out what you need to do.

Merely filing the affidavit doesn’t release you from the lawsuit, though. That affidavit instead serves as your response. Which means the petitioner will have the opportunity to respond, or advance the case further. If the petitioner files a response acknowledging they served the wrong person, effectively invalidating the service, you should be considered released once a copy of that is provided to you (could take a couple weeks) depending on the Court rules.

This may not be as easy as it sounds, and it all depends on how your name compares to the named respondent. In the case of the aforementioned foreclosure, my middle name differed from that of the named respondent, so a notarized affidavit showing my full name was enough to get me released.

If you have the exact same name as the respondent, you may need to appear in Court in order to provide additional identifying documents. Since the affidavit may only allow you to provide your full name. Now the initial hearing after you’ve been served is kind of like an arraignment. It isn’t where you argue the merits of the petition, only whether you agree or disagree with it. But it is where you can assert your identity since you need to show more than just your full name.

Depending on what is needed to show you’re not the same person, a new hearing might be scheduled, or the petitioner may talk with you after the hearing. Or you might be able to settle it right there if the Court allows for it – e.g. your name recently changed to that matching the respondent only due to you recently getting married, and you have a certified copy of your marriage license.

A lawsuit should not proceed against the wrong person, but the Court will generally presume the right person has been served until you can prove otherwise. And if it does proceed, it’s possible the account may have been fraudulently opened in your name. But the case generally needs to proceed into discovery to figure that out.

Paying or paid

If you’re paying within the terms of an agreed-upon settlement, that alone will be enough to get the suit dismissed. They can’t file a Court action unless there is an actual breach of contract that has not yet been remedied. And a settlement agreement is a remedy in the eyes of the law.

Paying the settlement in full is the same, legally speaking, as paying the debt. It releases you from any additional obligation.

In both instances, you just need to provide documentation through a response to the Court. In both instances, it’s possible the lawsuit was filed by mistake. But once it’s filed with the Court, you must still work with the Court to get it dismissed.

Fraudulent account

If you find a discrepancy between records or the account is fraudulent, you can dispute the lawsuit.

In the event of a records discrepancy, you’re not going to be able to get the suit dismissed. Instead you’ll just end up with a smaller judgment. But you likely won’t be able to make this determination until the lawsuit enters discovery.

In the case of a fraudulent account, though, you’ll need to show up to the initial hearing to state that you dispute the petition, request a continuance stating you believe the debt to be the result of fraud, then work to produce evidence that the account is fraudulent. As already mentioned, though, you may not be able to obtain this evidence until you’ve entered discovery.

Bear in mind, too, that once the lawsuit begins, everything typically needs to go through the Court. This means that even if you produce that evidence, you still need to file a motion with the Court to dismiss the lawsuit.

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The rest of Ben’s article goes beyond a collections lawsuit, so I’ll just end it here.