24 Capital Litigation: 5 Reasons Default Judgment Is the Real Risk

If a funder like 24 Capital has sued your business, the lawsuit itself is not the biggest danger. The real risk is what comes afterward: the default judgment. When a default judgment is issued, the funder will have the power to legally confiscate your money, sell off your assets, and potentially harm your credit score. Avoid this at all costs.

When people get sued, they often say, “it is all lies,” or “we don’t have anything for them to take,” or even “we can still work it out.” As silly as it sounds, those are some of the most common reactions when sued, and they tend to freeze owners in place.

1. They win everything

Unlike a normal lawsuit where you get to argue your side in front of a judge, a default judgment assumes every fact alleged in the lawsuit is automatically true. A default judgment allows the other side to recover against you for the full amount of their complaint plus court costs. If the amount owed is not fixed, there will be a second hearing to assess damages. If you skip that, whatever the funder is able to prove is automatically assessed against you by default judgment. They are the prevailing party (only by default, not on merit) and you are the loser.

2. The clock is short

If you were served in New York in person, you must file your answer within 20 days. Thirty days is allowed for other ways, for example using the Secretary of State. Just a few weeks is not a lot of time to process legal documents, find an attorney, and file an answer.

But there’s a catch: service on the Secretary of State counts as complete the instant they receive the papers, even though those papers don’t arrive at your own office until later via certified mail. So the clock is already ticking on your legal answer period, even though you haven’t seen the papers yet. Before filing a default judgment against a company served through the Secretary of State, the funder must also mail a copy of the summons to your last known address at least 20 days before. As busy as you are running your business, this may be the first you ever learn a lawsuit was filed.

By the time you learn of it, the other side has already invested time and money and made the lawsuit public. The time for bluffing is over.

3. Collection starts at once

If the creditor gets a judgment, they don’t need to wait to start collection. A lien can be placed on your real estate. Very soon after winning, the other side can have your bank account frozen with a “restraining notice.” That notice could freeze up to twice the amount owed for up to a year.

Once you lose a default, the funder can send you questions to answer under oath about where you hold your assets. The funder can issue questions to anyone who holds money for you, including services like PayPal and Venmo, or even your own tenants. Garnishment can potentially seize your bank, brokerage, stocks, and even your cryptocurrency accounts. The sheriff may be able to take your things. Along with the usual targets, such as vehicles or office contents, a sheriff may even reach part of your ownership stake in your own company.

4. It lasts and grows

A judgment against your business debt accrues interest at 9% a year in New York. And it’s only presumed to be “paid,” even if nobody is collecting it, after a full 20 years. Any payment or written acknowledgment of the debt restarts the clock at the beginning. Even when you pay the judgment in full, the funder must file a satisfaction of judgment with the court. Make sure they do so.

The lien on your real estate also has additional downsides. Your mortgage lender probably won’t write you a mortgage, and a title insurance company won’t insure your property. You likely can’t sell or refinance until the judgment’s gone.

5. Undoing it costs more

Losing a lawsuit costs more, the farther along it gets. Once a default judgment is handed down against you, the court may be willing to have the judgment thrown out. This lets you defend yourself against the lawsuit for real, with an answer. The court might not always do this, and the process can be expensive. In New York you need to act quickly: you have only a year after you’re served with notice of the judgment to file a motion for vacatur based on excusable default. One reason the court may overturn a default judgment is if the creditor failed to deliver the initial lawsuit to you properly. Courts may also reverse a judgment if it was obtained by trickery.

If you want a default judgment vacated on the grounds of fraud, misconduct, or no jurisdiction, there is no one-year deadline. It may also be reopened if you were never personally served, and had no notice. This last defense has limitations. You have only one year from learning about the judgment, and must file your motion no more than five years after the date of entry. You also need a real defense, not just “I don’t owe it.” Even if you’ve already missed a deadline, still call a lawyer right away. Reopening the case after a default judgment can cost even more time and money. You’d have a better position if you had answered the lawsuit right away.

Do Not Ignore the Lawsuit

Do not ignore the lawsuit or wait and “try to work it out”. Hire an attorney as soon as you realize you’ve been sued, even if you hope the matter can settle. Remember when you were served and the deadline for your answer. You will want copies of your contract, all emails, and bank records for loan payments. Settlement may be possible after a judgment is issued, but a plaintiff with a judgment can negotiate from a position of strength.

A free contract review costs nothing and takes a day or two. Call (888) 837-7053, or send the agreements to Delancey Street for a straight read on your options.