Can Being Sued For A Debt Be Good For Your Credit?

Can Being Sued For A Debt Be Good For Your Credit?

By |February 28th, 2012|

credit card lawsuit defense credit scoreBacked up on those credit card bills? If so, you’re not alone – in fact, 4.6% of all bank cards were in default in December 2011, according to the Standard & Poor’s/Experian Consumer Credit Default Indices. Take high unemployment, foreclosure rates that keep creeping up instead of down, and the ever-spiraling cost of medical care and you’ve got a recipe for disaster.  But could this be a good thing for you?

When you go into default on your credit card debts, the lender will first send the account to internal collections. You’ll get phone calls every few days, usually from relatively nice people, asking if you can make a payment.  With each passing day, your credit score will fall a little bit more.

After 180 days the lender will “charge off” the debt, which means it is considered uncollectible. It doesn’t mean you no longer owe the money, only that the lender isn’t of the mind that you’re ever going to pay it.

Many credit card lenders sell the debt once it is charged off. Companies purchase charged off credit card debt for less than face value, taking a chance on their ability to wring a few dollars out of you. It’s at this point that the bill collectors begin to contact you with increasing regularity.  By this time, your credit score is circling the drain.

Eventually, the debtor collector will make a decision on whether to file a lawsuit against you. Though the credit card lawsuit strikes fear in the hearts of most, a strong defense could represent a hidden opportunity for you to improve your credit score and get rid of your bill problems.

This Is Not Insanity

When you go past due on your credit card debt, your credit score slides down the sink hole.

When the credit card company charges off the debt and sells it, reporting typically ceases. The balance remains outstanding, but no new delinquencies accrue.

At the same time, the lender sells an electronic record to the debt buyer rather than your entire file. If the debt buyer wants a copy of the signed agreement or old statements they’ve got to pay extra. The amount isn’t tremendous on a per-account basis, but each debt sale involves thousands of accounts so it usually doesn’t make sense for the parties to worry about the documents.

In the end, the debt buyer leverages the number of accounts purchased against the likelihood that an individual consumer will either demand verification of the debt or defense a lawsuit. For the most part, that’s a bet that pays off in the debt buyer’s favor.

The Smart Money’s On The Defense

If you’re smart, you’ll work with a lawyer on a strong defense against the credit card lawsuit.

You’ll demand proof of the debt, and that the debt buyer is the proper owner of that debt.

You’ll demand to see a copy of the agreement you allegedly signed, as well as the old statements and charge receipts.

You’ll ask for an accounting as to how the finance charges were added up.

Do it right and you’re golden.

The End Result

In the end, the debt buyer won’t have a clue. This will often lead to either a permanent dismissal of the credit card lawsuit (called a “dismissal with prejudice”) or a favorable settlement.

With a dismissal with prejudice, you don’t owe the money – period. Your credit report should be cleared up, the balance brought to zero.  That’s good for your credit score.

If the debt buyer wants to settle, it’s got to be favorable or their lawyer is going to need to explain the utter lack of evidence to the judge. Nobody wants to look bad in front of the judge.

Either way, the deck is stacked in your favor when it comes to a credit card lawsuit. All you need is a strong defense.

So don’t fear the process server.  And if you’re served with a credit card lawsuit, don’t roll over and play dead.  It could be the best thing to happen to you.

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About the Author:

I've been a consumer protection lawyer since 1995, working to help people end their bill problems. I'm a faculty member at the Student Loan Law Workshop, a nationally recognized speaker, and a long-time member of both the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.