If you fall behind on payments to a creditor, your creditor will start calling and writing you to collect on the debt. Your creditor has up to six years from your last voluntary payment to sue you. If you are served with a lawsuit, it is critical that you do something about it quickly. When you are personally served with a lawsuit, you have twenty-one days to file a response to the complaint. If you do not file a response, the court will issue a default judgment against you and in favor of your creditor. That judgment is good for ten years. Under Michigan law, your creditor can renew the judgment for one additional ten year period.
Once they have a judgment against you, your creditor may start garnishing you. There are three ways your creditor can garnish you: (1) They can garnish up to 25% of your gross wages, which means the amount of your income before anything is taken out of your check for payroll taxes, social security, or any of the other payroll deductions. (2) They can garnish the funds you have on hand in your bank account. (3) They can intercept your income tax refunds, which means that the taxing authority would send part or all of your income tax refund to your creditor instead of sending it to you. Your creditor cannot garnish you until they have a judgment. That is why it is critical to answer the complaint in a timely manner when you are served with a lawsuit in order to avoid a default judgment.
In the complaint, your creditor has to state a cause of action. A person cannot sue you because they don’t like you, nor can they sue you for no reason at all. There are various reasons in the law why someone can sue you. These reasons are known as causes of action. Under Michigan law, the typical cause of action for a lawsuit to collect a debt is known as “Account Stated.” The elements of account stated are that you received the money from the creditor, you agreed to pay it back, and that you failed to make the payments you agreed to make.
In the lawsuit, your creditor has to state facts in the complaint that establish the elements of account stated. Typically, a complaint will contain several numbered paragraphs explaining why the court should rule in the creditor’s favor and against you. Your response to the complaint is known as an answer. Your answer should include a response to each paragraph of the complaint. Each paragraph of your answer will correspond to a paragraph in the complaint. For example, if paragraph four of the complaint states that you are $2,500 behind on your payments, you would respond to that statement in paragraph four of your answer. You would respond to that statement in one of several different ways: (1) Agree; (2) Deny; or (3) Neither admit nor deny. There are other possible responses, but these three are the most typical.
If you deny one or more paragraphs of the complaint that have to do with the elements of account stated, the court will not enter a judgment but will instead set the matter for a hearing provided that you timely gave a copy of your answer to the court and the creditor who sued you and also presented the court with a document known as the proof of service. The proof of service states that you mailed a copy of your answer to the creditor who sued you, and what date you mailed it. This will buy you some time to try to work out a payment arrangement with your creditor to pay what you are able to pay each month rather than be garnished 25% of your gross wages.
If your debts are large enough and you qualify for bankruptcy, timely responding to the complaint will also buy you some time to file for bankruptcy. A bankruptcy filing will not stop every kind of legal proceeding. For example, filing for bankruptcy will not stop a criminal prosecution. But the filing of a bankruptcy will stop a lawsuit of the type stated in this article.
The above information is not intended to be used as legal advice. If you are served with a lawsuit or considering filing for bankruptcy, the best thing to do is call our office and schedule a free consultation with me so that you can receive advice which is tailored to your unique financial circumstances.
By Michael Benkstein