Credit Card Lawsuits and Judgments

Getting served a Summons and Complaint can be shocking for most people.  It usually threatens the Defendant with suing for a certain amount on a credit card.  If the Defendant doesn’t show up on the court date, the court will enter a default judgment if the Plaintiff’s attorney appears.  Filing for bankruptcy may be a good idea if you have a pile of lawsuits laying around.  If you earn an income, these Plaintiff creditors may try to garnish your wages or even levy bank accounts after receiving a default judgment.  Filing for bankruptcy prevents credit card creditors and their assignees from further attempting to collect on the debt, even if the lawsuit has been already filed.  This “automatic stay” is a powerful weapon when filing for bankruptcy and when the credit card debts and lawsuits are discharged, the debtor start fresh.


Automatic Stay

An automatic stay prevents creditors from taking any collection action against you.  This includes phone calls, filing lawsuites, pre-foreclosure activities, monetary collections, garnishments and freezing bank accounts.  An automatic stay is one of the most powerful tools in a bankruptcy filing because it allows debtors some immediate breathing room.  If a filer’s wages are being garnished, the bankruptcy court immediately notifies the employer, and the garnishments must stop.  All collection calls must also stop.  That’s the good news.

The issue is when there is secured property (such as a home or car).  Because physical property has been secured by a mortgage or auto loan, the creditor in these situations can file a motion seeking relief from the stay.  Some do, some don’t.  If the secured creditor does file the motion, the bankruptcy court will almost always grant it, thereby allowing the secured creditor continue their collection activities.

Are Income Taxes Dischargeable in Bankruptcy?

Income taxes can be discharged only if they fully meet certain criteria:

1) You must have filed a return for the tax year(s) you want discharged.
2) The return was FILED at least 2 years before the date of your bankruptcy filing.
3) The tax return itself was DUE at least 3 years before the date of your bankruptcy filing.
4) The IRS has NOT audited your liability within 240 days of the date of your bankruptcy filing.
5) You did not willfully evade paying the taxes.  This means you did not try to hide or falsify the numbers in your return, or illegally attempted to avoid paying taxes.

It’s important to remember that liens placed on your home by the IRS are NOT lifted by a bankruptcy filing.  Wage garnishments and frozen bank accounts are lifted, however.

Wage Garnishments

How do wage garnishments happen?  Most creditors must first obtain a court judgment.

A creditor (such as a credit card company) files a Summons and Complaint against the debtor.  The court then assigns a docket or index number to the case and calendars a date for a trial.  On the trial date, if the creditor shows up and the debtor does not, a default judgment is usually declared.  The problem is that a creditor often does not serve the Summons and Complaint properly to the debtor, or a debtor may have simply ignored the pile of mail that includes the Summons and Complaint.

On the other hand, if the creditor does not show up, and the debtor does, then the court will dismiss the case.  In New Jersey, whether the case is dismissed with prejudice or not depends on the court and judge.  A case dismissed with prejudice means that the creditor cannot bring the case up again for the debt that was already contested.

If both sides show up, then the creditor must show adequate evidence to prove their case.  The amount of evidence required in most New Jersey courts is pretty high.  If a creditor wins a case, a judgment declares how much is owed.  The creditor then can legally ask the debtor’s employer to garnish (take) a portion of every paycheck until the judgment amount is satisfied.

Chapter 7 bankruptcy is one way to get the garnishment lifted and erase the judgment amount owed at the same time.