Us Bank Business Debt Lawsuit: 5 Things to Do First

Normally a lawsuit is not a good thing, and that includes U.S. Bank suing over a business loan. But it is not an automatic disaster. Find the deadline to respond, call a business attorney, read your loan agreement and the personal guarantee, and learn what a judgment could let the bank do. Then talk settlement or other options.

1. Find your deadline

It is very important that you find out when your deadline to answer is. Typically you have a certain number of days after the lawsuit was served on you to answer the lawsuit. In federal court, lawsuits will give you 21 days to file your answer. If you miss the deadline it can be extremely costly. In some cases the failure to answer a lawsuit can lead to you losing the case automatically.

If you agreed to waive formal service, then your answer could be due 60 days after the waiver request was sent to you. If you never respond, the court may enter a default judgment for the amount claimed, plus interest and collection costs.

2. Hire a business attorney

Since a lawsuit means the bank has hired a lawyer, hiring a business attorney of your own is the best decision you can make. These lawsuits can be extremely complicated, especially when dealing with large amounts of money. The lawyer should know what defenses you have available, and how much negotiating room you have for a settlement. A corporation or partnership can only be represented in federal court by a licensed attorney, so a member generally has to hire one to protect its interests. Keep in mind that the federal debt-collection law is written to protect personal consumers, so it generally does not cover business debts. So a collector on a business loan usually has more leeway to reach you. If a collector takes it too far, talk with an attorney.

3. Pull your loan papers

You will need to have your loan agreement in front of you before you can really understand what the bank is suing you for. If you gave a personal guarantee, make sure you can access that document as well. Loan paperwork can run many pages, and if you sign a loan or are pulled in as a cosigner you can miss the legalese. The guarantor can be sued if the business fails to pay the loan.

Your loan agreement will define what is considered a default, which may include violations of covenants as well as missed payments. A secured loan gives the bank the ability to seize collateral. Some lenders file a Uniform Commercial Code lien on broad business assets including accounts receivable. In some cases banks can take funds from the business bank account without a court order, depending on the lien terms. Once in default, some lenders can contact your customers and instruct them to pay the bank instead.

4. Know what a judgment means

You should also spend some time understanding what it means for the bank to win the lawsuit. If the bank wins they get a judgment against the business and possibly the guarantor if the loan was guaranteed personally. If the bank gets a judgment it will have much greater power to seize assets.

With a judgment, state law may let a bank garnish wages, put liens on property, and freeze bank accounts. On the other hand, federal law caps the garnishment of wages owed to a person who guaranteed a business loan at 25% of weekly disposable earnings, or less if your pay is low. You can ask the court to set aside the judgment if you think it was based on a mistake or excusable neglect, but generally you have only a reasonable time to do so and may not have more than one year.

5. Then talk settlement

If you believe the lawsuit is valid you may want to negotiate a settlement. With an attorney to assist you, try to contact the bank’s attorney to determine a reasonable payoff amount.

Before picking up the phone, work with your accountant to learn what you can afford. Financial institutions often prefer to renegotiate rather than face losing money from a complete default. Options like forbearance, deferment, and lower payments may change terms but not reduce debt.

If the bank cancels any of the debt you owed, the Internal Revenue Service generally treats the canceled amount as taxable income, unless an exclusion applies, like bankruptcy or insolvency. Banks must file a form 1099-C with the IRS if they cancel $600 or more. Keep good records, and check with a tax preparer or business lawyer about all the effects of a settlement.

Under pressure, you may tend to pay the person who calls most. Often, that’s the wrong order. Don’t use retirement funds that would be protected in bankruptcy to pay debts that could be discharged. Chapter 7 bankruptcy is a liquidation. Chapter 11 is a reorganization. You can continue operating while arranging new terms with creditors. Ask a bankruptcy lawyer about the different chapters.

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.