Before suing to collect a debt, as a lender you must first do the same type of due diligence investigation that you performed before granting the loan. You should inquire about the debtor, review the loan documents with your attorney, evaluate the collateral if applicable, and investigate if any other parties have a secured interest in the loan or interest in the debtor’s obligations. In addition, your attorney will want to verify that the statute of limitations has not expired.
Here are the usual steps a lender should take before suing to collect a debt:
- Gather all public information about the debtor. That information should include contact information such as the debtor’s name, corporate identity, address, and officers. If the debtor is an individual, confirming employment information is also a major factor because it can indicate your ability to recover damages. If any information does not match the information originally provided to secure the loan, you can obtain additional information through background investigation websites and social media. Keeping regular tabs on the debtor can mitigate the risk of using outdated information.
- Evaluate your relationship with the debtor and potential liability as a lender. You should consider alternatives to filing suit such as instituting installment plans or waiving late fees to incentivize payment. If the debtor has a lawyer, these alternatives may be met with more resistance. If the debtor has a counterclaim against you, that is another factor to weigh in determining whether to file suit. For example, a lender may be exposed to a claim of preferential transfers or claims that the lender acted outside the bounds of consumer protection laws. If the debtor is filing for bankruptcy, you also must avoid collection efforts or risk violating the automatic stay.
- Compile all the relevant loan documents. You should consult with your attorney to determine if the loan documents are enforceable and compliant with applicable laws. Your attorney should advise on the post-breach terms of the loan documents. For example, what kind of notice must you provide to the debtor regarding the breach? Have any enforcement rights been waived by either party? What is the cure period for the breach? Is there an acceleration provision in the loan agreement that makes the entire value of the loan actionable?
- Consider rights in collateral. If the loan is secured with collateral (e.g. a car), you will need to consider your rights in the collateral. Can you seize the collateral on breach of the loan agreement? You will need to assess the condition of the collateral and what the value of the collateral would be at sale.
- Determine whether there are other lenders and who they are. What is their leverage compared to yours? Have other lenders initiated lawsuits of their own? Are your rights subordinate to any other lenders via a separate contract or filings?
Filing the Lawsuit
Once you have prepared for the lawsuit, you will file a complaint through your attorney setting out the basis for the claim and obtain a summons for the debtor to appear in court. If the debtor’s obligations are supported by a guarantor or a jointly liable debtor, those parties should be included in the complaint. Often the lawsuit will be brought by an agent of all relevant lenders to avoid inter-lender conflicts and to expedite allocation of payouts.
You may hire someone to handle service of the summons and complaint. They are typically delivered in person to the debtor. Under N.J. Rules of Court 4:4-3, if you cannot reach the debtor in person, the complaint and summons can be mailed certified mail return receipt requested, and if receipt is denied, you can use regular mail.
Default and Deficiency Judgments
The debtor will have 35 days to answer the complaint. Often the debtor will not answer, which gives you an opportunity to secure a default judgment. Upon obtaining a default judgment, the case is effectively over unless the debtor can successfully have a motion to set aside the default judgment granted. You will still need to enforce the judgment, however.
If you foreclose on the collateral (e.g. repossess a car and sell it at auction), and the proceeds are not sufficient to satisfy the debt, you may obtain a deficiency judgment in New Jersey through filing a separate claim, which requires the debtor to pay any remaining balance of the loan. Often a lender will forego a deficiency judgment if the person or entity is on the verge of bankruptcy or insolvent.
Possible Defenses the Debtor Could Raise
If the debtor answers your suit, you and your lawyer should be prepared for the usual defenses. These include, but are not limited to:
- Payment was already made.
- You do not have standing to enforce the loan agreement.
- The amount of the debt is inaccurate.
- You acted in bad faith for not honoring installment payments.
- Mistaken or stolen identity.
- Procedural errors in filings.
- Bankruptcy discharge.
- The statute of limitations on the debt has expired.
You also need to be prepared for potential counterclaims or a debtor leveraging separate actions for improper debt collecting practices.
Summary Judgment Motion
If you have performed your due diligence as set out above, after the debtor answers, you may be in a position to move for Summary Judgment. The goal here is to convince the court that there is no question about the fact that the debtor owes you money. You will need to have done a thorough job in collecting the loan documents and resolving disputes with other lenders to succeed. You should be prepared for the debtor to claim that the amount is not owed in whole or in part. Now is also the time where counterclaims by the debtor for violations of debt collection laws surface. If the court grants your motion, it will enter judgment in your favor and the case is over, although the debtor could appeal.
Typically, a couple months after the complaint is served, a hearing will take place if the summary judgment motion was not granted. The amount of debt in controversy will determine the venue. If the debtor owes the lender $3,000 or less under the complaint, the suit will be heard in New Jersey’s Small Claims Section in civil court. If the amount of the debt is between $3,001 and $15,000, the case will be heard to the Special Civil Part. For suits where the amount of debt exceeds $15,000, the case is heard in the Civil Part of the Law Division of the Superior Court.
You will put in your case as the plaintiff and will have the burden of proof to establish the debtor breached the loan agreement and therefore the debtor owes the debt plus justifiable interest. The debtor will then have the opportunity to put on a defense and further rebut any of your claims with evidence.
Once both sides have concluded their presentations of evidence, the judge will enter a judgment. The judgment may be more layered than just paying what is owed. Often the amount ordered to be paid will vary depending on the application of interest. If the judge rules in favor of the debtor based on technical issues (e.g. ineffective service of process), the case will be dismissed without prejudice meaning the suit can be refiled. Either you or the debtor may appeal an unfavorable ruling.
Most debt collection cases in which the debtor does not default settle before or during the lawsuit. The cost of suing to collect a debt can be significant. And a critical issue for a lender when the case goes to judgment is that the lender still has to collect on that judgment. Collection methods such as wage garnishment can take months. The debtor simply may not have the money or may be filing for bankruptcy anyhow rendering the debt non-collectible. Agreeing to a lump sum payment in settlement of the debt or staggered payments over the course of time can alleviate a lot of the time and expenses incidental to lawsuits and still be a satisfactory resolution for both parties.
If you need assistance collecting a debt or enforcing a judgment, call Snellings Law LLC at 973.265.6100 to speak with an experienced debt collection lawyer.