Facing a debt collection lawsuit in California could have severe consequences, especially if you ignore notifications from your creditor. Many debtors think that ignoring the lawsuit will make it go away. However, this approach can lead to serious repercussions. Not responding to a collection lawsuit can result in a default judgment.

In return, this can significantly impact your financial stability and creditworthiness. As a debtor, you need the help of a bankruptcy attorney if your creditor or lender sends you a notice of suing you or files a debt collection lawsuit.

Also, in this article, you learn what happens if you do not respond to a California collection lawsuit, the legal process involved, and the steps you can take to protect your interests.

An Overview of California Debt Collection Lawsuit

Creditors use debt collection lawsuits to recover unpaid debts, including personal loans, vehicle loans, credit card fees, and medical bills. Lenders and creditors file these lawsuits against debtors who have defaulted on their payment obligations.

California law regulates this process and includes several steps you should understand to defend your rights and interests.

The Collection Suit Process

This process involves the following steps:

  1. A Demand Letter

Before a creditor files a lawsuit, they usually send you a demand letter. This letter is a formal request for payment, detailing the amount you owe and the timeframe within which you are required to settle the debt to avoid legal action. The demand letter is the final warning before the creditor initiates a lawsuit.

  1. Making a Complaint

If you do not respond to the demand letter or fail to pay the debt, the creditor will file a formal complaint with the court. This complaint outlines the details of the debt, including the amount you owe and the basis for the creditor's claim. Along with the complaint, you receive a summons notifying you of the lawsuit. It also provides instructions on how to respond.

  1. Response

After receiving the complaint and summons, you have about 30 days to file a written response with the court. This response, also known as an "answer," allows you to dispute the creditor's claims, present any defenses, and avoid a default judgment.

If you fail to respond within the specified timeframe, the court may issue a default judgment in favor of the creditor.

  1. Judicial Process

If you respond to the complaint, the case proceeds through the judicial process. This includes several pre-trial activities, such as discovery, where both parties exchange information and evidence relevant to the case.

During this phase, depositions, interrogatories, and requests for documents are common. If the case does not settle during pre-trial negotiations, it goes to trial, where a judge or jury will determine the outcome.

  1. Entry Of Judgment

After the trial, the court will issue a judgment based on the evidence presented. If the court rules in favor of the creditor, the judgment will specify the amount you should pay. For example, the original debt, interest, and any court costs or attorney fees. This judgment is legally binding and enforceable.

  1. Debt Collection Attempts

Once a judgment is entered, the creditor can begin collection efforts. These efforts can include:

  • Wage garnishment, where a portion of the debtor's income is automatically deducted to pay the debt
  • Bank account levies, where funds are seized directly from the debtor's bank accounts
  • Property liens, which can affect the debtor's ability to sell or refinance real estate

You want to respond promptly to a debt collection lawsuit, even if you believe the debt is incorrect. Ignoring a lawsuit can lead to a default judgment, which can trigger collection actions.

Your bankruptcy lawyer will represent you against firms, banks, and debt collection agencies. If another collection agency purchases your debt, communicate with them instead of your original creditor.

However, federal and state laws offer you numerous protections. For example, debt collection agencies cannot harass you or issue threats. The law allows debt collectors to call you during specific hours of the day and must obtain your permission to contact you at your workplace.

Default Judgment

A default judgment is a legally binding decision the court makes in favor of the creditor when you fail to give a response within the specified time frame. This judgment means the court has decided the case without your input, based solely on the creditor’s allegations. The creditor can then utilize various legal mechanisms to collect the debt, affecting your financial stability.

Moreover, A default judgment could appear on your credit report, damaging your credit score. This negative mark could remain on your credit report for up to seven years. Therefore, it is more difficult to obtain loans, credit cards, or even housing.

Once a default judgment is entered, you lose the opportunity to dispute the debt or negotiate directly with the creditor in court. This makes it challenging to contest the amount you owe or any associated fees and interest.

What You Can Protect Using California Bankruptcy Exemptions

California law provides certain exemptions that enable debtors to protect specific assets from being seized during the bankruptcy process. These exemptions help ensure that you can maintain a basic standard of living while managing your debt.

These assets include the following:

  • Real Estate

California’s homestead exemption protects equity in your primary residence. As of 2023, homeowners can exempt up to $600,000 in home equity, depending on the county of residence. This means that if the equity in your home is below this threshold, it cannot be used to satisfy debts.

  • Personal Property

Several personal items are protected under California exemptions, including household goods, clothing, appliances, and tools of trade. These exemptions ensure that you can keep necessary personal and professional items.

  • Motor Vehicles

You can protect equity in one or more motor vehicles, up to a certain limit. This exemption allows you to retain essential transportation for work and daily activities.

Consequences of Missing The Deadline

After the 30 days specified in the summons lapse, it might still be possible to consult an attorney and revert. Certain circumstances may allow you more time. For example, if the creditor has not obtained a default judgment yet.

Most creditors fill a request for entry of default and court judgment once the deadline to respond has expired. Per California Code of Civil Procedure (CCP) 587, you or your attorney should have a copy of this document. Normally, it is mailed to you.

The lender cannot obtain a default judgment without including an affidavit confirming that the copy of the entry of default was mailed to you. The law also states that if you do not receive this document, it does not nullify or allow setting aside any judgment. Therefore, the creditor could request a default judgment even if you do not receive the entry of default.

Per California CCP 585, the judge can enter a judgment against you in favor of the lender shortly after the lender files the request for entry of default.

Impacts of The Entry Of A Default Judgment

A default judgment carries significant consequences beyond acknowledging the debt. Firstly, the judgment amount is typically much higher than the original debt. This increase is due to the addition of attorney fees, creditor expenses, and court costs incurred by the debtor.

Additionally, the judgment grants the creditor significant power over you. As indicated in the summons form, once a creditor has secured a judgment, your property, money, and wages may be deducted without an additional court warning.

The Initial Thing A Default Judgment Offers A Creditor

Liens are usually imposed on any property you possess by a creditor as soon as they acquire a judgment. For the lender, this procedure is simple, but it could have detrimental effects on you.

The court where the judgment was issued receives an Abstract of Judgment from the creditor. This is a brief summary of the ruling, verified by the clerk of the court. In accordance with California CCP 697.310, the creditor must then submit the abstract to the county recorder in the county where your property is located to place a lien on it.

If the abstract is recorded, it creates a lien on any property you possess or will own in that county. After the date, this lien is still in effect for ten years, per California CCP 697.310(b).

How Does A Judgment Lien Affect My Home Or Other Real Estate?

When a lien is imposed on property, it usually converts an unsecured debt into a secured debt that is backed by that property. As a result, the debt is secured against your home's equity by a judgment lien. As such, the entire judgment amount plus accrued interest would normally need to be paid when you refinance or sell your house.

Your home equity is reduced during this time by the judgment debt, which may negatively affect your credit and restrict your available financial options. Any equity that builds up over time is subject to the lien, even if there is initially no equity in your home when the lien is first filed.

The judgment may be extended within the first ten years and then again, which would negatively impact your property equity each time.

Can a Creditor Initiate Foreclosure On The Judgment Lien Against My Home?

A judgment lien may, under certain conditions, result in foreclosure, which entails forcing the sale of your house to pay off the creditor.

But because of the homestead exemption, which protects a certain percentage of your home's equity from creditor claims, foreclosure is frequently averted. Many houses that were previously at risk of foreclosure due to judgment debts are now protected due to this recent adjustment in exemption limits.

How Does A Judgment Lien Affect Other Real Estate?

All interests in real property within the county where the lien is established are covered by a judgment lien under California Civil Code Section 697.340(a), regardless of whether they are current or future, vested or contingent, legal or equitable.

If you own property that is not listed as your homestead and there is a significant amount of equity in that property, the creditor may start the foreclosure process. This is so because the homestead exemption does not offer the same level of comprehensive protection for such property.

Furthermore, as stated in California Civil Procedure Code 697.340(b), the judgment lien is attached to any interest in real estate you purchase in the future, as long as it is still pending in that county.

Do Judgment Liens Also Affect Personal Property?

A Notice of Judgment Lien is sent to the California Secretary of State by a creditor to achieve this. Anywhere throughout the state, your personal property is subject to a lien under California Civil Code 697.530(a).

This gives creditors the right to try and seize any non-exempt personal property that you may have under the personal property exemptions in California. Additionally, the judgment lien will show up on your credit reports, which can make it more difficult for you to get loans for other credit or cars.

Creditors have the same unlimited ability to extend judgment liens on personal property as they do on real estate. Mobile homes and registered cars are exempt from this lien placement procedure for personal property. 

California CCP 697.530(d)(1) says that, if your vehicle or mobile home holds significant equity, creditors have other avenues to access that equity, such as through a writ of execution and sheriff’s sale.

What are Your Available Options?

If you find yourself facing a collection lawsuit or are concerned about a default judgment, learn your available options to protect your assets, especially when dealing with potential liens on your property.

One strategic approach, particularly if your property currently holds no equity, involves negotiating with creditors. When creditors recognize that there is no equity to satisfy the debt through a lien, they may be more inclined to consider alternatives to placing a lien.

This negotiation could potentially lead to a settlement arrangement or a structured payment plan that avoids the immediate need for a lien on your property.

This tactic hinges on demonstrating to creditors that pursuing a lien would yield minimal or no financial gain for them, thereby incentivizing them to explore other resolutions that could be mutually beneficial.

Avoiding Liens When Your Property Has No Equity

When your property has no equity, it means that the value of the property is less than the outstanding debts secured by it. When facing a collection lawsuit or potential default judgment in California, this situation can affect how creditors approach the enforcement of their claims.

Strategies to avoid liens when the property has no equity include:

  • Negotiation with Creditors

Clearly communicate to creditors or their representatives that your property holds no equity. This can be demonstrated through recent property valuations or financial statements. Propose a settlement agreement where you agree to repay some of the debt over time.

Creditors may be more willing to negotiate and avoid placing a lien if they see that pursuing a lien would not lead to substantial recovery.

  • Legal Defenses and Challenges

Explore if there are procedural errors or violations of your rights in the debt collection process. In some cases, legal defenses can delay or prevent the enforcement of judgments.

Demand that creditors provide clear evidence of the debt and their legal right to enforce it. This can sometimes reveal weaknesses in their case.

  • Bankruptcy Considerations

Depending on your overall financial situation, filing for Chapter 7 or Chapter 13 bankruptcy may provide protection against creditor actions, including the enforcement of liens. Initiating bankruptcy proceedings triggers an automatic stay, which temporarily halts most creditor actions, including liens and foreclosures.

Steps to Take After Receiving a Notice of Default Judgment

You want to take prompt and strategic action to protect your rights and interests after receiving a Notice of Default Judgment. Here’s a detailed guide on what to do next:

  1. Collecting Information

The first step is to gather all relevant information pertaining to the default judgment and the lawsuit. This includes:

  • Obtaining a copy of the default judgment and carefully reviewing its terms, including the amount owed and any additional conditions
  • Collecting all court documents related to the lawsuit, including the initial complaint, summons, and any responses or motions filed
  • Compiling any correspondence with the creditor or their legal representatives regarding the debt and the lawsuit

  1. Determine Your Legal Action Plan

Once you have gathered the necessary information, assess your legal options and formulate a plan based on your specific circumstances. If you agree with the default judgment and the debt owed:

  • Contact the creditor or their attorney to discuss setting up a payment plan to satisfy the judgment.
  • Negotiate terms that are manageable based on your financial situation.

If feasible, consider paying the judgment amount in full to avoid further legal complications or enforcement actions by the creditor.

  1. Settling the Judgment

If you wish to settle the judgment to resolve the matter, propose a lump-sum settlement amount that is less than the total judgment amount. Creditors may accept a reduced sum to expedite debt recovery. Engage in negotiations with the creditor or their attorney to reach a mutually agreeable settlement amount and terms.

However, if you believe there are grounds to challenge the default judgment, consult with a qualified attorney to assess potential legal defenses, such as improper service of process, lack of jurisdiction, or substantive defenses related to the debt.

In California, you may file a motion to vacate the default judgment within a reasonable time frame if you have a valid defense or if there were procedural errors in the judgment process.

Find a Skilled Los Angeles Bankruptcy Attorney Near Me

Ignoring legal notices and failing to respond to a collection lawsuit in California can have serious consequences. It often results in a default judgment being entered against you, which gives creditors the legal authority to pursue aggressive collection actions, including wage garnishment, bank levies, and liens on your property.

If you find yourself in this situation, contact a skilled bankruptcy attorney to help you navigate your options and protect your rights. At Los Angeles Bankruptcy Attorney, we help individuals facing debt and collection lawsuits in Los Angeles and surrounding areas.

Contact us at 424-285-5525 to schedule a consultation.