Last week the New York Times broke a story suggesting that several large credit card issuers are using nefarious legal tactics to recoup defaulted credit card debt via the courts.

According to one of the judges, some 90% of the credit card lawsuits he sees are flawed, as the card issuer cannot prove who actually owes the debt. This is a good time to review your rights as a debtor as it pertains to the collection of defaulted debts.

How common are creditor lawsuits?

First off, if you default on a debt the creditor has the right to sue you to collect the debt. I wrote about that for Mint’s blog, here.

And while creditor lawsuits are not necessarily rare, they are the last ditch effort by a creditor to collect monies due.

Point being, creditors would much rather collect debts without having to sue you because of the costs involved.

Advertisement

When does a credit account officially become “in default?”

If you find yourself falling behind on a credit card debt, you’ll have about six months before the creditor deems the account as being “in default.” Once it goes into default, you’re essentially in the eye of the storm and it’s about the get really rough on you.

You’ve probably ignored statements, past due notices, and phone calls from the creditor. And at this point, they’ve likely enlisted the help of a debt collector to attempt to compel you to pay your bill.

What if the balance is incorrect?

If a debt collector contacts you and you don’t recognize the debt or feel the balance is incorrect, you have the right to ask the collector to validate the debt. You’ve only got 30 days after their initial contact to request validation, so don’t waste time.

If you ask them to validate the debt, they must stop collection activities and obtain verification of the debt and provide you with the name and address of the original creditor.

If you do recognize the debt, either before or after the validation has been provided, then you’re going to want to offer a settlement. I never, ever suggest making settlement offers except when debt collectors are involved.

Debt collectors are either working on contingency or have purchased the defaulted debt for pennies on the dollar, so they don’t have the same skin in the game as the original creditor. That makes reasonable settlement offers very attractive to them because they’re still making several hundred percent (or more) on their investment and you’re getting out of the debt for less than you originally owed.

My credit card issuer is suing me — what should I do?

If a credit card issuer sues you, then you have one of two choices. You can either ignore the lawsuit summons, which means you’ll lose by default. At that point, a default judgment will be entered against you and you’ll now be referred to as a “judgment debtor”, which means the creditor can use legal means to take your money. This can include seizing assets and even garnishing your wages.

Your second choice is to reply to the lawsuit. You normally have 30 days to do this and you’ll probably need an attorney. You can certainly represent yourself, called “pro se,” but you may not have the legal knowledge necessary to follow the proper protocols.

If you know or suspect that the debt is not yours or is invalid, then you absolutely have to respond to the lawsuit. If you don’t respond, then you will not have the opportunity to point out the deficiencies in the credit card issuer’s case.

Further, if the debt is what’s referred to as a “time barred debt,” then the creditor cannot legally sue you to collect the debt. Where you lived when you incurred the debt will determine how long a creditor has to sue you for collection. I wrote about that for Mint’s blog, here.

But again, if you don’t respond to the lawsuit, then you can’t point out that the debt is time barred.

Really?

As unbelievable as this is going to sound, credit card issuers are not required to maintain copies of your application indefinitely. In fact, some states only require that an issuer maintain the original application for a few years.

This means a court battle can take on a “your word versus mine” type of scenario where the creditor assumes it’s your debt because you’ve used the card and have made payments.

And while this is fine a vast majority of time, it’s not sufficient in court. The creditor must have solid evidence that the debt does, in fact, belong to you.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.