Monthly Archives: June 2009

What To Do If You Default In A Debt Law Suit

Default Judgment
A default judgment is what happens if you fail to “answer” the lawsuit against you on time. The debt collector asks the judge to enter a “default” judgment against you, and this means you have lost the case. If you do not take action to reverse it, the company will start to garnish your wages or take your bank accounts if they can find them.

But all is not lost–you can get the judge to take back the default and force the company to work for its judgment.

First Thirty Days
For the first thirty days, a default judgment is called an “interlocutory” judgment, which means that it is not considered “final.” It is actually fairly easy and almost automatic to reverse a default judgment less than thirty days old. In most jurisdictions, all you have to do is tell the court you did not intend to default on the case as a means of somehow abusing the system. Almost any reasonable excuse will work: car failure, misunderstanding of court time or place, inability to obtain a lawyer, etc. I do not suggest that you attempt to deceive the court, simply that the courts are pretty lenient about things for the first thirty days after a judgment is entered.

After Thirty Days
After thirty days it becomes somewhat more difficult to get rid of a default, but it is still very possible, and you should certainly try it.

Some Background
Let’s take a step back to understand why. First a definition: the word “default” has two meanings relevant to debt cases. When you fail to make a payment due on a loan, this is known as a “default.” This is not the kind of default I discuss in this article. Rather, the “default” I intend to discuss here is what occurs when you fail to make a defense of a suit on time. This kind of default is not “favored” in the law because it is not a judgment based on the real facts (merits) of the case. Rather, it is made based on a “procedural” mistake. That means that courts are more willing to undo a default than any other kind of judgment. Keep that in mind.

Every jurisdiction has “Rules of Civil Procedure” which outline what you must do to undo a default. Undoing a default is called “setting it aside,” and the name of your motion is “Defendant’s Motion to Set Aside Default Judgment.” In every jurisdiction of which I am aware, for the first thirty days all you must do is allege that you didn’t intend to game the system by defaulting and state that you wish to make a defense. Because the courts do not like judgments based purely on procedural mistakes, they will routinely set aside the default.

After thirty days, the default is harder to set aside. In that case, in most jurisdictions at least, you must actually provide a “good cause” for your failure to answer on time or seek to set aside the default within thirty days, and you must allege facts constituting a defense to the matter brought.

“Good cause” is a pretty vague term in the law as it is in real life. I have frequently had clients who called the lawyer for the debt collector after receiving the petition and were told that (1) they “didn’t need to worry” about the suit, (2) the lawyer for the debt collector would postpone action on the suit, or (3) the parties would settle the claim, or something like that. This unfortunately seems to be a fairly common thing for the debt collectors to do, and in my experience it has always served as “good cause” to set aside the judgment later. Similarly, if the client was waiting for a lawyer to contact them about representing them or there was some other legitimate basis for delay, the courts have often accepted it as good cause. Remember, the courts do not favor defaults and are supposed to stretch a little to allow you to undo one. At the same time, the courts try not to allow dirty tricks or manipulations, and simply bringing an end to litigation (finality) is also a value in itself. So do not think that the courts will not look carefully at this part of the equation.

A “defense” must also be alleged. And that means that you must claim for some reason that you do not owe the money the debt collector claims you owe. That could be because you have already paid it, or they’ve agreed to take the amount you’ve paid as a “satisfaction” of the debt, or that you never owed the money in the first place. In some courts you can claim that the plaintiff has exaggerated what you supposedly owe and is not entitled to all they have alleged, but in some jurisdictions this is not enough.

What To Do
So how do you know what to say and what will work? Actually, it’s not hard.

Your courthouse (or any law school) will have a legal library. You must go to this library and find a copy of the “annotated rules” of your jurisdiction. Your jurisdiction is the court in which you are being sued. If it’s a county or city court, this will mean finding your state’s annotated rules of civil procedure. When you get the annotated rules, look up the rule on defaults, which will normally contain the rules for undoing defaults. “Annotations” are notes of what courts have ruled on cases involving the rule in question, so if you find the annotated rule on default judgments, you will find many cases involving “good cause” and “facts constituting a defense.” You look at the ones the court has accepted and state your facts in the same way.

It also makes sense to “cite” the case to your judge, and this means telling your judge the name of the case like yours where the court set aside the default. An example of a cite is: Smith v. Jones, 123 Cal.3d 458, 462 (Cal. 3d Dist. 2008). That means that the case was Smith against Jones, and the court decision was reported in Volume 123 of the third set of California Reporters starting at page 458, and the specific analysis or rule of the court came on page 462. And that the date the case was decided was in 2008.

A Warning
One final warning. You must bring your “Motion to Set Aside” within a “reasonable time,” whatever that means. It can mean a lot of different things, but one thing it certainly does mean is that you should not waste a lot of time about it. This term too will likely be discussed in the Annotated Rules. A year after the default will almost always be too late, but anything before that is probably worth taking a shot at. But remember that you are not going to be permitted to “sit” on your rights without taking action. So do it quickly and do not waste time. Remember that if you leave a default in place, the debt collector will try to take your money. There probably aren’t many things you can do to earn more money per hour than you will save by reversing a default judgment, so it is almost certainly worth trying.


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Sued for Debt–Is Bankruptcy the Right Choice?

When people are being sued for debts, they often panic and look for the quickest, easiest, least scary way out. And bankruptcy often occurs to them as the solution. This is understandable because they are being threatened with eviction or the sudden loss of their bank accounts or wages. Bankruptcy seems to offer a quick fix because actions by the debt collectors are “stayed” (stopped) during the bankruptcy proceedings.

I believe there are much more effective ways to handle old debt, especially credit card or merchant account debt that has been sold to a debt collector. Panic is not necessary, and bankruptcy is often not the best solution in a real-world sense. Here’s why. For the video, go to:

Debt is divided into two types: “secured,” and “unsecured.” Secured debt means that the debt has specific assets backing it—if you miss payments, you can have your house foreclosed or your car repossessed and sold to pay off the loan. These things “secured” the debt and can be sold if you stop making payments.

Unsecured debt is debt that is not secured—it isn’t attached to any specific assets. Just because a debt is “unsecured” does not mean that you cannot be sued for the debt, of course. On the contrary, it means you must be sued in person for the debt collector to collect money from you. Debt collectors often don’t mention this fact to people they are harassing to try to collect from. If and only if the creditor can get a judgment against you, it can collect money by “enforcing” the judgment against you by garnishing wages or attaching accounts. But this can be difficult for various reasons.

Lenders on secured debts are in a much better position than those who are not secured. One of those advantages comes in bankruptcy.

In the law, the item securing a debt (the “security”) is really regarded as belonging to the creditor who lent the money. Specifically, consider a mortgage on a house. The house “secures” the debt, and if you stop making payments the bank can take the house and sell it to pay the debt. In the bankruptcy law, it is considered unjust to allow someone not paying for the property to keep it from the rightful owner. So the lender typically asks for the bankruptcy “stay” to be “lifted” so that foreclosure can take place. Although this can sometimes be delayed, the courts usually “relieve” the lenders and allow them to foreclose on secured debt. (Of course there are times when the delay is helpful to the consumer, but it is expensive, and in my observation it rarely helps at all.)

With unsecured debt, on the other hand, the debts are simply added up and paid according to how much money the bankrupt person has. Usually very, very little. And only at the end of the bankruptcy procedure. So bankruptcy could offer some help with unsecured debt.

What all that means practically is that if you have a large secured debt (mortgage) that you cannot pay, bankruptcy will offer you very little protection. If you have a large unsecured debt, bankruptcy will protect you, but it is slow, time-consuming and expensive compared to defending yourself against the debt collector.

Some examples may make it clearer.

Consider the Smiths. The Smiths have a house and make payments of $2.500 per month. Mr. Smith loses his job and they fall behind in their payments. If the family seeks bankruptcy as their house payments add up, the lender will obtain “relief from the stay” and foreclose on the house. The Smiths are out of luck, and bankruptcy usually does not help. This may change somewhat if some of the bankruptcy legislation goes, through.

Now consider the Joneses. If the Joneses have credit card debt of $25,000 and Mrs. Jones loses her job so they can’t make payments, they could seek bankruptcy help. It would probably cost them at least a thousand dollars to file, require them to disclose most or all of their finances over the past year or two, and fill out a vast amount of paperwork. At the end of the proceeding, at least a year later, their debts would be wiped out. But so, of course, would their credit reports. The bankruptcy filing will remain a mark against them for seven years.

The Jones could, however, simply defend themselves against the lawsuits brought by the debt collectors. For reasons I’ve made clear elsewhere in this blog and at, their chances of winning the suit would be excellent. And if the Jones do it right, they can simply get the debt eliminated. This does not usually mean completely cleaning their credit reports, but it can often mean canceling the debt and removal of the recent credit report damage inflicted by the debt collector. And it usually will happen in less than six months from the date the debt collector brings suit.

They can do it all themselves for almost no money at all and probably less time and effort, all told, than a bankruptcy would require.

Better results, less cost. That’s why it’s often better to defend yourself against credit card debt than to seek bankruptcy protection.

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