Timeline of a Consumer Debt Lawsuit: Before the Lawsuit is Filed

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In other articles we’ve talked about the steps necessary to successfully complete a Chapter 7, a Chapter 13 or a Chapter 11 case. In this article we talk about what happens in a typical lawsuit filed by a creditor on a credit card or other unsecured debt like medical bills or personal loans.

In our next article, we talk about what happens after the lawsuit is filed and during trial.

Timeline of a Consumer Debt Lawsuit: Pretrial and Trial

To learn more about what happens after trial and how creditors collect judgments, read:

Timeline of a Consumer Debt Lawsuit: Motions and Appeals

Timeline of a Consumer Debt Lawsuit: Collecting the Judgment

Delinquency

If you don’t make a payment when it is due, you are delinquent. Delinquency is usually defined by the contract you signed. That contract may have started as an application for the credit card and include your cardholder agreement or other documentation issued by the credit card company. It could be governed by the paperwork you signed before a medical procedure in which you acknowledge that you will be responsible for any cost of the procedure not covered by insurance. It may be a formal promissory note like the one you would sign to purchase a car, take out a personal loan from a bank or loan company or even a payday loan.

Most of time you are technically in default if you fail to pay by the due date even if the creditor has agreed not to impose a late charge until sometime later.

Default

After some period of delinquency, your debt will be considered in default. This is usually after a significant period of delinquency, perhaps as little as 60 days or as long as nine months. You may also be considered in default even if your payments are up to date other circumstances arise. For instance, you are considered to be in default if you file a bankruptcy case, your collateral becomes damaged or you allow insurance on the collateral to lapse.

Generally, a creditor will not file a lawsuit until the debt is in default.

Collecting the Debt

A creditor has three choices for how it treats a non-paying debt: collect, sell or sue.

     Send it to Collections

Creditors will often attempt to collect the debt by calling and/or writing you. Some creditors prefer to hire a collection agency, but many will spend at least some time - perhaps 60 to 90 days - trying to collect themselves.

The creditor can continue collection efforts indefinitely. Many people believe that a creditor cannot attempt to collect a debt that is past the statute of limitations. This is not correct. The statute of limitations is nothing more than a state law that places a deadline for a creditor to file a lawsuit on the debt. Some people also believe that a creditor cannot collect a debt that is too old to be reported on a credit report (usually older than seven years). This is also not correct. The obligation to pay the debt remains until the debt is paid, discharged in bankruptcy or forgiven by the creditor. In either case, the creditor or the collection agency can continue to call or write you demanding payment.  

To learn more about negotiating your debts, see Tackling Your Debt: Renegotiating Your Credit Cards.

To find out what you need to know to deal effectively with a collector, see Tackling Your Debt: Dealing With Debt Collectors.

     Sell it

The older the debt becomes, the more likely the creditor will sell the debt to another company. That way, the debt gets off the original creditor’s books, the original creditor gets some of its money back, and the right to payment passes to the debt buyer. Most of the time, the debt buyer will pay much less for the debt than its face value, often just pennies on the dollar. This can work to your advantage. Often, the debt buyer is content to settle for significantly less than the face value of the debt because it paid so little for it and can still make money on it even if you don’t pay the full amount you owe.  

     File a Lawsuit

The creditor’s final option is to sue.

But just because they can does not mean that a creditor will sue. Most creditors will have a policy of filing a lawsuit only if the debt is more than a certain amount. I rarely see a suit for less than $3,000. If the suit is for $7,500 or more, I count on seeing suit papers. It’s all based on a cost/benefit analysis for the creditor.

 

Next up: Timeline of a Consumer Debt Lawsuit: Pretrial and Trial