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Surviving Debt: Will the Collector Actually Sue You?

If you are in default on a debt, a creditor or debt buyer—generally referred to as a collector in this chapter—can sue you to collect the money owed. The important question, though, is whether they will sue you. Often, the answer is “no,” even in cases where the collector repeatedly threatens to sue. The following may indicate that a collector will not sue:

Surviving Debt: Can You Win the Lawsuit?

You will lose any lawsuit if you do not respond properly. If you do respond properly within the applicable deadlines and raise reasonable defenses, you have a good chance of winning or of the creditor dropping the lawsuit. The stronger your defenses, the better your chances.

Surviving Debt: How to Respond to a Lawsuit to Collect Consumer Debt

Always Pick Up Your Certified Mail and Open Notices from Courts. You will not escape the consequences of a lawsuit by hiding from notices about that action. Even if you do not think you have any defenses to the lawsuit, it is much better for you to be involved in your lawsuit than let a debt buyer or creditor get whatever they want from the court.

Surviving Debt: Common Defenses to Raise

The facts of each case are different, and each state has its own laws. Here are some common defenses:

The Lawsuit Was Brought in the Wrong Court. If you are not sued in the county where you live or where you signed the contract with the creditor, it may have been filed in the wrong court.

Surviving Debt: Common Counterclaims to Raise

A “defense” is a term used to explain the legal reason you do not owe the money being sought. A “counterclaim” is a term used to explain the legal reason why the person suing you owes you money (usually because they did something illegal). If the amount you request in your counterclaims is large enough, they may wipe out everything you owe and even allow you to recover money from the creditor, its debt collectors, or a debt buyer. You may be able to assert a counterclaim against the collector suing you, even if your claim relates to the conduct of the original creditor.

Surviving Debt: Special Rights If You Are Active-Duty Military

If you are sued while you are on active duty with the military, or within the first 90 days after you get off active duty, you can ask the court for a postponement or “stay” of the case. The lawsuit will not be dropped, but the case will not move ahead while the stay is in effect. Once the stay ends, you have to defend the case.

Surviving Debt: Going to Court

Attend All Court Proceedings and Respond to All Papers You Receive. Attend all hearings that are scheduled in your case. If you don’t show up, a default judgment will be entered against you even if you filed an answer or appearance earlier. If you cannot attend, send someone else to ask for a delay (usually called a “continuance”) and explain the reasons why you could not attend the hearing that day (such as illness, family emergency, preexisting and unavoidable work conflict, or unusual transportation problems).

Surviving Debt: Be Wary of Deals You May Be Asked to Make in the Court’s Hallway

The collector’s lawyer will not want to try the case and often will find you in the courtroom hallway and try to work out a deal. Sometimes court officials will even instruct you to negotiate with the collector’s lawyer; the judge may even ask you to talk to the collector’s lawyer before they will even hear the case. The collector’s lawyer is only looking out for the collector’s interest and not yours. No matter what the collector’s lawyer tells you, they are not there to help you and may be taking unfair advantage of you or even misrepresenting things to you.

Surviving Debt: Undoing a Default Judgment

Not filing a written answer or appearance within the specified time, failing to attend a hearing, or missing other deadlines may result in you losing the opportunity to raise your defenses. This is usually called a “default judgment.” Try to never lose by default.

Surviving Debt: Your Appeal Rights

If you lose the case, the court will issue a judgment against you, and this judgment may allow the collector to seize your money and other property. For a detailed discussion of civil court judgment debt and its implications, see Chapter 22. If you lose a lawsuit at the first court level, you may be able to appeal to a higher level. For cases heard in small claims court, this usually means appealing to the state’s trial court.

Surviving Debt: Introduction

Utility providers have a powerful method of forcing you to pay your utility bills—they can shut off your service. But you often have various ways to avoid such termination even when you cannot pay your utility bills, and you also may have rights to get your service turned back on, as set out in this chapter.

Surviving Debt: Your Rights When the Utility Threatens to Terminate Your Service

Utilities Must Follow Rules Before Terminating Your Service. You have rights when companies threaten to shut off or terminate your utility service, particularly the larger utilities that are usually regulated by your state public utility or public service commission. Your rights vary a lot by state, so you should ask the consumer division of your state utility commission what rights you have. Municipal utilities and co-ops are not typically regulated by state utility commissions but may provide similar protections from disconnection as the regulated utilities.

Surviving Debt: How to Get Your Utility Service Turned Back on

If your service has been shut off, it may be difficult to get it restored, and it may even be difficult to obtain new utility service from the same company if you move to a new residence. The utility will typically demand that you pay the old bill plus late charges, a reconnection fee, and often a deposit. Of course, obtaining utility service at a new address is not an issue where the landlord supplies the utility service at the new address, or the utility service is in someone else’s name.

Surviving Debt: Ways to Reduce Your Utility Bills

Even if you can avoid utility shut-offs, you will be in trouble in the long run if you cannot afford your utility bills going forward. It is essential to reduce the cost of future bills as much as possible.

Changing Your Communications Services (Telephone, Internet, and TV). Today, the rapidly evolving communications marketplace provides more options for paring back services to meet your basic communications needs.

Surviving Debt: Introduction

When your debt burden is overwhelming, you may find yourself behind on your taxes. Most people have a variety of tax obligations. The three most common are property taxes and federal and state income taxes. Advice on property taxes is found in Chapter 19. This chapter concentrates on back-due federal income taxes. Some of the information here also applies to state income taxes. Resources for getting help are listed at the end of this chapter.

Surviving Debt: File the Return on Time Even If You Do Not Pay the Taxes Owed

One of the worst things you can do if you cannot afford to pay your taxes is to not file your tax return. You must file an income tax return, in general, if you are a U.S. citizen or resident alien, and your taxable income exceeds certain amounts.

For the tax year 2023 (taxes due April 15, 2024), you have to file your return if:

Surviving Debt: Options for Paying Tax Debt

If you cannot afford to pay your taxes, the solution is not to put the taxes on your credit card which you also will have trouble repaying. As described below, the IRS will give you a better deal than putting the tax payment on your credit card. Interest rates will be lower, there will not be a processing fee to pay, and you may even get the IRS to reduce your obligation.

When you file a return but cannot afford to pay the taxes due, you will generally have three options in dealing with the IRS:

Surviving Debt: Spousal Defenses

In certain limited cases, your responsibility to pay a tax may be cancelled when the tax is owed entirely by your spouse or ex-spouse. This cancellation may be available when your spouse or ex-spouse was solely responsible for failure to pay the taxes, the taxes are entirely attributable to your spouse’s separate business, or if you were the victim of domestic abuse. This is true even if you filed a joint return. If you believe you are entitled to the IRS’s “innocent spouse relief,” you can file a Form 8857, but help from a tax professional is recommended.

Surviving Debt: Steps the IRS Can Take to Force Payment

If you do not set up a payment plan, negotiate an offer-of-compromise, or secure CNC status, the IRS can force payment. Before the IRS actually forces payment, it will generally send you a series of threatening letters, for instance a Notice of Tax Due and Demand for Payment or Final Notice of Intent to Levy.

These notices inform you that the IRS intends to seize or “levy” your property. The IRS can take any or all of your property, such as bank accounts, paychecks, with the exception of certain exempt types of income and possessions.

Surviving Debt: Effect of Bankruptcy on Your Tax Debt

Bankruptcy is not as effective a remedy when dealing with taxes as with other debts. In general, only old tax debts can be discharged in a chapter 7 bankruptcy—for example, where the debt stems from a timely filed return that is more than three years old. Existing tax liens are likely to remain on your property even after a bankruptcy.