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Craig Allen: Sued By a Collection Agency? Debt Management Strategies You Need to Know

Amid a rapidly changing legal environment, those in debt need to be proactive to gain relief and resolution

Longtime readers of my columns or those who listen to me on KZSB each weekday morning know I have been teaching debt management and financial planning courses for years, and that I developed the “Dump That Debt! System,” which is a five-step method anyone can use to get out of debt quickly and stay out of debt permanently.

Over the years, I have learned a few key aspects of the debt management process that I impart to my clients suffering from the challenges of eliminating debts. One of the most damaging and stressful areas of this process is dealing with a creditor or collection agency lawsuit.

Before I begin, I would like to state clearly that I am not an attorney, so nothing in this article should be construed as legal advice. My intent is to provide those facing debt challenges with some general information to start them down the road to debt freedom. Anyone facing serious debt problems, especially with regard to lawsuits, should consult an attorney specializing in debt relief before making any decisions regarding their specific debt issues.

For more than 23 years, I have been working in the financial services industry, managing assets for wealthy clients, and also offering financial planning and debt management services. Debt collection efforts during the past two decades have evolved, as have many businesses. Today, especially with the long recession and in particular the implosion of the real estate market, an unprecedented number of Americans now face severe debt problems. As a result of the growing number of those in debt, many debt collection businesses and debt consolidation businesses have been established to take advantage of the opportunity to collect on bad debts. The increasing level of sophistication in the industry and competition for these bad debts have resulted in more aggressive and complex tactics that those in debt must understand and navigate.

While the traditional methods of harassing phone calls, letters and emails continue, the new breed of debt collector is typically a law firm specializing in debt collections. These firms many times forego the calls, letters and emails, and go directly to the courts, filing lawsuits against debtors. In the past, the consensus in the industry was that the cost of filing suits and going to court, often requiring the engagement of a third-party legal team, far outweighed the potential revenue from any judgment that may be secured. In other words, the costs associated with going to court far outweighed any money that could be collected, even if a judgment was granted by the court. The wisdom of the time was that the debtors were broke and that’s why they are so deep in debt, so they don’t have any money to pay the judgment, so why bother?

Can you get blood from a stone?

Today, the new generation of debt collection firms is oftentimes comprised of law firms, which have salaried staff, including attorneys, available to file lawsuits and go to court to get judgments. The game has changed forever. What these law firms have done is to change the operating model of the collection agency, controlling their fixed costs by keeping the legal work in-house. They have also realized that many people, despite being deep in debt — so deep in fact that they have been forced to default on their debts — still have a reasonable amount of income. The combination of lower collection/legal costs and potential access to an income source has motivated enterprising law firms to actively seek a legal remedy to collect debts.

Just because they are smart, motivated and enterprising, does not mean they are always ethical. In fact, it is commonplace for these firms to use shady tactics to serve paperwork to debtors. The law requires that a legal service of process take place before a lawsuit can proceed. However, it is very, very common for process servers to simply drop paperwork at the door of the debtor, or worse, do nothing, and claim to have properly (legally) served the debtor the paperwork for a lawsuit.

Each jurisdiction has rules regarding the means of service of process. Typically, a summons and related documents must be served upon the defendant personally, or in some cases upon another person of suitable age and discretion at the person’s residence or place of business or employment. In some cases, service of process may be effected through the mail as in some small-claims court procedures. In exceptional cases, other forms of service may be authorized by procedural rules or court order, including service by publication when an individual cannot be located in a particular jurisdiction.

In the usual case, proper service of process requires the process server to place the paperwork in the hand of the person being served. Again, too often, this is not what happens. Many times those being sued don’t even know there is a case pending against them, and therefore they don’t know they have a scheduled court date. The court date comes and goes without their knowledge, and then they get a notice in the mail stating that a default judgment has been entered against them. Once a judgment has been entered, it can be expensive and next to impossible to get it removed. At this point, the law firm with the default judgment is in complete control and can basically dictate terms to the debtor. Very often, in addition to the original amount owed, the law firm will tack on its supposed legal costs/fees, filing fees and whatever else it can get away with, which is quite a lot with the court system today.

This whole court process is so routine that no one seems to question or care whether the law has been followed. In fact, once a default judgment has been entered by a court, it costs several hundred dollars just to get a court hearing to try to convince the court that the debtor was not properly served and didn’t know there even was a case. If the debtors do not want to represent themselves, it can cost several thousand dollars just to have an attorney represent them in this hearing, to say nothing of the additional cost of actually representing them should the default judgment be vacated. Keep in mind that, even if the default judgment is vacated, a new court date will be set, and the debtors will still have to defend themselves against the lawsuit.

If you have defaulted on debts, and you receive paperwork in the mail stating that you are being sued, the worst thing you can do is to ignore it. It will not go away! Although some debt collection agencies do use scare tactics, once a suit has been filed, if you do nothing, the court will enter a default judgment against you if you do not show up for your court date. The best course of action is to be proactive and try to negotiate a settlement with the creditor or collection agency. Often they will accept a smaller amount than what is owed if they can avoid the additional cost of court and if they can begin receiving payments or a lump sum immediately. Often they will accept less if you can pay the full amount immediately versus making payments, so if you have the cash, you can use that as an additional bargaining point.

Sometimes if they have gone so far as to file a suit, they may not be willing to negotiate. In this case, you will still very likely save yourself some money versus allowing them to get the default judgment, because they will again tack-on additional legal fees, etc., which you will them be responsible for paying. Also keep in mind that once they secure a default judgment against you, they can garnish your wages and even attach your assets, including your bank accounts. For most people, this is a worst-case scenario that can be absolutely devastating.

Communication is key in these situations. It is better to communicate with the debt collector after a suit has been filed, even if you decide to go to court and defend yourself. At a minimum, you will learn some information, and will know if they are willing to negotiate with you. Failing to respond prior to your court date will result in a default judgment, which can be very expensive, time-consuming, frustrating and, ultimately, financially devastating.

Craig Allen, CFA, CFP, CIMA, is president of Montecito Private Asset Management LLC and founder of Dump Your Debt. He has been managing assets for foundations, corporations and high-net worth individuals for more than 20 years and is a Chartered Financial Analyst (CFA charter holder), a Certified Financial Planner (CFP) and holds the Certified Investment Management Analyst (CIMA) certification. He blogs at Finance With Craig Allen and can be contacted at .(JavaScript must be enabled to view this email address) or 805.898.1400. Click here for previous Craig Allen columns. Follow Craig on Twitter: @MPAMCraig.

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