Alternatives to Bankruptcy: Litigation–Why Would I Want To Get Sued?

11 Oct Alternatives to Bankruptcy: Litigation–Why Would I Want To Get Sued?

As I stated in my prior post, there are ways besides bankruptcy that you can deal with your debts is to let your creditors sue you. Hunh? Why on earth would anyone want to get sued? A legitimate question and my answer is not one given lightly nor does it apply in all situations.

In order to make this option of dealing with your debts feasible, you will most likely need a lawyer well-versed in defending debt collection suits. Preferably, this lawyer is also well-versed in claims under the Fair Debt Collections Practices Act and applicable state debt collection law. Generally, I am talking about lawsuits against you for old credit card accounts but this type of strategy can sometimes apply to other collection accounts.

So, when would allowing a creditor to sue you make sense? It would be helpful to delve into how collections are handled nowadays.

Often, when large credit card banks “charge off” a credit card account, the bank will bundle up thousands of accounts and sell the portfolio to other entities called bad debt buyers.

The bad debt buyer will purchase this portfolio of debt for pennies on the dollar. By that, if a debtor owed an alleged credit card account balance of $5,000.00, the bad debt buyer may purchase the account for 3 cents on the dollar or $150.00.

The documentation that the debt buyer receives from the original creditor on the account is usually bare-boned—that is, name, address, and other rudimentary information. The debt buyer will then sue you and try to collect the full amount of the alleged debt. This is big business and some bad debt buyers purchase portfolios of credit card accounts for hundreds of millions of dollars (still at 3¢ on the dollar).

In this type of situation, the bad debt buyer is counting on you, the debtor, not responding or taking any action on the lawsuit. In fact, if you do respond, particularly with a lawyer, often the debt buyer will file a dismissal because they know they cannot prove the debt in court.

Some states, such as North Carolina, have enacted legislation greatly restricting how bad debt buyers may operate and if the bad debt buyer fails to comply with the requirements, the debtor can sue and may recover money from the bad debt buyer.

So, if you are facing a lawsuit by a bad debt buyer, it may be a sound strategy to litigate the case. Often, in a debt buyer case, you can whip ‘em in court. I have seen folks win these cases without the assistance of lawyer (I would advise against this) but a lawyer well-versed in these debt buyer lawsuits often can win in court or, at least, negotiate a settlement where the debt buyer will dismiss their case with prejudice (which means it can’t be filed again) and that the trade lines are deleted from your credit report. Sometimes, the debt buyer will even pay your lawyer’s fees.

Once, I had a client who was sued four times by different debt buyers. He had initially wanted to file bankruptcy and while he was getting his documentation together, I filed an answer to the debt buyer’s lawsuit. We messed with it for a little while and the debt buyer dismissed the case and paid my fees (and some money to the client). My client got sued again and we got the same result. The client enjoyed it so much, we let the others sue him and once those cases were gone, he did not have much need for bankruptcy.

It should be pointed out that if you are being sued by a first party creditor such as XYZ Bank who originated the debt, these suits can be much more difficult. Those creditors often do have the means to prove the debt (but not always seeing as how a lot of credit card debt is securitized but that is for another day).

If you have a significant amount of debt and you get sued by a bad debt buyer, it may make more sense just to seek bankruptcy protection and get rid of all your debts. An experienced bankruptcy lawyer, particularly one who is versed in consumer protection statutes, can help you make a decision as to whether the “litigation” strategy or bankruptcy strategy is the best one to deal with your financial situation.

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Adrian Lapas, Esq.

I've been practicing bankruptcy law in North Carolina since 1993, and am certified as a specialist in consumer bankruptcy law by the North Carolina State Bar.
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