Creditor Lawsuits and Common Myths that Need Busted
Being sued by a creditor is a serious event and there are real consequences to ignoring a lawsuit.
If you wait long enough after you stop paying your credit cards, chances are fairly high that one or more of your creditors or a collection agency will file a lawsuit against you. The purpose of filing such a lawsuit is so that the creditor can get a judge to render a decision (judgment) that you owe them a particular sum of money. Your responsibility to respond to the lawsuit to avoid such a decision starts from when you were served with a summons and complaint. Usually this service must be done at your residence and the documents are personally given to you or someone else that lives at your house by a process server.
For many people, the first time they start searching for an attorney is when they are sued. Ideally, if you cannot afford to repay your debts or are having trouble doing so, this is when you should consult with a bankruptcy attorney to see if there are remedies available to help you get back on track.
I hear a lot of myths about creditor lawsuits that are simply inaccurate and not supported by California law. The first is that you can't lose your house to a creditor if you have "homesteaded" it. This is simply not true. While recording a homestead declaration is a good idea because it helps you save a bit on property taxes and decreases the likelihood of a forced sale, it does not prevent a sale. If the creditor can demonstrate that a sale of the house will pay your homestead exemption in full ($100,000), pay off all other senior debt like mortgage/deed of trusts, and pay a portion of the creditor's judgment, such a motion can be granted and your house can be sold. You then have a six month window to reinvest the proceeds of the sale in a new primary residence or risk losing those proceeds as well. If you have a judgment and own a home, there is a limited window of time where you can remove the judgment lien in a bankruptcy proceeding and continue living in the house. The longer you wait, the more the equity builds in your home, the larger the judgment lien becomes with interest accruals, and the less likely it can be completely removed in a bankruptcy.
The second myth about creditor lawsuits is that you can ignore them if the statute of limitations has passed on collection. This is not true, either. The Statute of Limitations is an affirmative defense. You have to respond to the complaint to assert it or you effectively waive it. The judgment, once entered, can be difficult to set aside and is fully enforceable until set aside. You cannot pull out a statute of limitations defense and use it to block a wage garnishment or a bank levy.
The third myth is that you can ignore a creditor lawsuit because you don't have any assets for the creditor to take. While you may believe you have no assets, if you are employed, the creditor can use the judgment to commence garnishment of wages from your employer. The creditor can record an abstract of judgment so if you acquire real property in that county, a judgment lien attaches to that property. Also this approach discourages you from saving and acquiring assets such as real estate, vehicles, etc. A bankruptcy for a person with little to no assets can be very straightforward and what little assets you do have you can keep. You also would not have to worry about the creditor finding out where you work and trying to take a quarter of what you take home.