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What happens when a creditor takes you to court?

On Behalf of | May 17, 2022 | Bankruptcy

When you borrow money from a business, you will sign a promissory note or similar legal documents that obligate you to repay the amount owed. Whether you need money to cover medical care or to finance the purchase of a vehicle, you will have to repay the full amount with interest, often according to a specific schedule.

If you miss payments or send in less than the minimum amount, the lender may initiate collection efforts to bring you back into compliance. Depending on the terms of your loan or the circumstances in which you accrued the debt, missing a few payments could be enough to trigger a lawsuit brought by the creditor.

What could potentially happen when a lender takes you to court over the balance that you still owe?

They will have to ask a judge for a judgment against you

The whole point of a creditor taking you to court is to obtain a judgment. A judgment is essentially a court order enforcing your financial obligations to the company. There are two possible negative consequences of a judgment.

The first, arguably better-known, outcome is the courts ordering the garnishment of someone’s wages. The courts can allocate a significant portion of someone’s disposable income toward creditor repayment when they fall behind. A judge is unlikely to consider someone’s claims of financial hardship when ordering a garnishment and will instead focus on how far in arrears they are and their current income.

In some cases, a judge may grant a lien against personal property rather than the right to garnish someone’s wages. Homes and vehicles are frequently subject to liens after a creditor seeks a judgment in court. When there is a lien on the title of something you own, you will not be able to refinance, transfer or sell that asset until you pay the creditor first.

Bankruptcy can help those recently served by a creditor

Coming home to see written notice of a pending lawsuit taped to your front door or answering the door to a process server can make you panic, but you still have options up until your day in court. When you file for bankruptcy, the courts will grant you an automatic stay until they review your case and potentially discharge your unsecured debt.

The automatic stay prevents creditors from calling you at home and also stops all forms of collection activity. The courts will dismiss a pending lawsuit until either you resolved your bankruptcy filing or your creditor goes to court and asks for special consideration.

Knowing what steps to take when you face a creditor lawsuit can help you avoid garnishment and regain control over your current financial circumstances.