Debt Collection Lawsuit + Delay = Bankruptcy

Debt collectors and debt buyers file a lot of lawsuits.  Tens of thousands annually here in Arizona alone.  That is a lot of paper and a lot of lives that are being impacted.  Each week I meet with numerous families who are in complete panic mode because they have been notified by their employer that their wages are going to be garnished.  In Arizona a creditor can garnish up to 25% of each paycheck.  That is a big chunk – especially if you are living paycheck-to-paycheck.

Nearly all of the people I meet who are being garnished were sued by one of the big junk debt buyers like Midland Funding, LLC, LVNV, LLC, or Portfolio Recovery.  They were sued, ignored it, and as a result the court entered a default judgment. I understand why people don’t respond to the debt collection lawsuit.  Many don’t know how to respond (see my article on how to respond to a debt collection lawsuit) and some hope that it will just go away if they ignore it.  The thing is, it won’t.  The debt buyer that is suing you is a well-oiled machine when it comes to suing people and garnishing wages and bank accounts.  If you do nothing you can be assured that one day your paycheck will be about 25% less than it should be or wake up to see that your checking account has been drained.

It is all fine and good for me to tell people that the need to respond to the debt collection lawsuit.  But it doesn’t really help you if you are already facing garnishment because a default judgment has already been entered.  So what do you do?  You really have three options:

Get the Court to Set Aside the Judgment

Even after a default judgment has been entered you can go back and ask the judge to set it aside.  This can work if the judgment was not entered that long ago and if you have a good reason for not responding (for a list of what is considered a good reason, click HERE).  If you delay though don’t count on a judge being very sympathetic.  Even if you have the most compelling reason in the world, if you come to a judge 2 years after the judgment was entered and expect them to set it aside, dream on.  It ain’t going to happen.  At least it is highly unlikely.  Judges like things to be final.  Going back and revisiting a judgment entered years ago is likely not going to be very successful.

If you are successful in getting the judgment set aside, then you will have an opportunity to contest the claims in the debt buyers lawsuit.  Often, if you are being sued by Midland Funding, LLC or one of the other big junk debt buyers you can be successful.  I have written several articles on this under the topic of “Collection Lawsuits“.

Settle the Debt

A second option if a judgment has already been entered against you is to try and settle the debt.  Before making an offer to the creditor you need to sit down and evaluate your finances and come up with a settlement budget.  Do you have access to money that would enable you to offer a large lump sum?  Do you have a retirement account, savings, or could a family member help you?  If you don’t have access to a lump sum, what is the most you could pay on a monthly basis and still be able to meet your families basic needs?  The reason why this exercise is so important is because you don’t want to offer something you can’t back up.

Once you have your settlement budget contact the creditor and present the offer.  Sometimes it is best to handle this in writing.  But if you are in a hurry due to a garnishment, call the lawyer’s office and give them the offer over the phone.  Understand that most collection law firms are run by a handful of attorneys and a million paralegals (maybe a little less).  You will likely talk with a paralegal who will tell you whether they will accept it or not. If they won’t accept your offer make them come back to you with a counteroffer.  Don’t negotiate against yourself.  Make them be part of the process.

Most debts settle for anywhere from 35% up to 75% of the overall debt.

Bankruptcy

Bankruptcy.  No one wants to do it, but many times it is the best overall solution.  The two options listed above are great if you don’t have a lot of other debt.  However if this debt collection lawsuit is just the tip of the iceberg you likely should file bankruptcy.  Bankruptcy can help you in two ways: first it stops the garnishment.  As soon as you file your bankruptcy case the creditor can no longer garnish your bank accounts or wages, or even call you or send you snotty letters.  It all must stop.  Second, it will discharge (or eliminate) the underlying debt – along with all of your other credit card debts, medical bills, store cards, etc.

Bankruptcy has drawbacks for sure, but it is by far the most powerful tool out there for dealing with debt problems.

I fully realize that none of these options are great.  But then again, it is always good to have some options when dealing with your debt problems.