When a person signs a contract agreeing to pay a debt, the contract usually gives the creditor the right to sue the debtor if he does not pay. Even if the contract does not specifically state this, most state laws give the creditor the right to seek remedies from the court system. The process details vary according to the laws of the debtor's home state.
Timeline
Creditors have no specific timeline by which they file lawsuits on unpaid debt. Generally, after six months without a payment, a creditor will write the account off. This is strictly an accounting term where a creditor removes the balance from its book of active accounts. From there, it will usually go to a collector. Some creditors maintain in-house collection agencies that may even operate under a different name and use these departments to file lawsuits, but, often, the debt is sold or assigned to a third party collector or debt buyer. Many of these buyers are more likely to file a lawsuit, though it could be up to two years before they do. Of course, the creditor can sue at any time the debt becomes delinquent.
Process
If the debt total is lower than your state's limit for small claims court, the lawsuit will be filed there. A debtor will receive a court summons, usually delivered by a sheriff or other officer of the court. The summons will have a court date and a date by which the debtor must respond. A debtor should respond to the summons; failure to do so could result in a default judgment against the debtor. When the court date arrives, the debtor can attend court, but if the debt is legitimate, he will lose the lawsuit most of the time. With the judgment in hand, the creditor can seek other methods to collect, such as wage garnishments and property attachments.
Settlement
When it reaches the lawsuit level, the debtor may still have the option of settling the debt. If the creditor is a debt purchase company, it probably purchased the debt for pennies on the dollar. The debt buyer could see a settlement offer of 20 to 50 percent of the debt amount in cash as an immediate profit and willingly accept this offer and drop the lawsuit. A debtor will probably need cash to negotiate the settlement, but some creditors will accept payments over a few months, particularly if the debtor gives it electronic access to the account to take automatic payments.
After the Judgment
The next actions the creditor will take after it receives a judgment will be to try to collect on that judgment. It may contact the debtor personally to collect but will more likely ask the court for a hearing on disclosure. The debtor will receive another summons and must go to this hearing or risk a civil arrest, where the debtor is brought to court by the sheriff. The debtor will have to disclose his financial situation and how he intends to pay. Some states allow the creditor to bypass the disclosure process, and the courts will begin issuing attachment orders and garnishment orders, if the debtor's state allows these actions. Settlement is still possible at this point. Since a debtor can file for bankruptcy and eliminate the judgment completely, he still has power to negotiate.
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