Finwise Bank Business Debt Lawsuit: 5 Things to Do First

A business loan lawsuit means that the creditor wants a court to rule that you owe the money and if you lose, the judge will order you to pay the debt. Whatever you do, do not ignore the lawsuit. You may be tempted to do exactly that because you are so busy. But that would be an enormous mistake.

Your first move after a lawsuit from FinWise Bank is to check the due date for your answer. This is more important than it might seem. Then learn who owns the loan now, as it may be assigned to a special purpose vehicle (SPV). With these details you can investigate whether your debts are secured (requiring collateral) and covered by your personal guarantee. Look closely at the contract terms for defenses. Then, taking into account your own circumstances, decide to settle, restructure or declare bankruptcy.

1. Mark your deadline

To respond to the lawsuit from FinWise Bank you have to answer in time. That means giving your reply to the court and your creditors before the time runs out. Generally, in federal court you have 21 days to answer a lawsuit. If your case was filed in Utah, for example, you would have 21 days to respond if the plaintiff served you within the state, and 30 if the plaintiff served you in another state. If you don’t answer at all you could be in default, meaning that the bank can ask for a judgment for what it claims to be due.

A default judgment in your case gives FinWise Bank the opportunity to garnish your wages and place liens on your property, as well as restrain your bank account. But in Utah, for example, you might be able to undo the default, according to Utah Rule of Civil Procedure Rule 60(c), as long as your motion to set aside the judgment is based on mistake, inadvertence, surprise, or excusable neglect and is made within 90 days of entry of the judgment.

2. Find out who is suing

Once you know what your time limit is to respond to the business lawsuit from FinWise Bank you should know who is actually trying to collect from you. It may not necessarily be the bank, which could have transferred the loan to a new owner in the form of an SPV. So review the name of the company that claims you owe them money. Is it in fact, FinWise Bank, or is it another company, an investor or an SPV?

3. Pin down the debt

You also need to understand the nature of the loans. In other words, you should carefully review the loan agreements and figure out if the loans are secured or unsecured. If they are secured that means that you pledged collateral that the creditor could take in case you defaulted. If they are unsecured then the creditor generally cannot take your assets without going to court. Your FinWise Bank loans might not be backed just by collateral but also by your personal guarantee. That’s an agreement that you made that you would personally repay the money if the company failed to do it.

A guarantee lets FinWise Bank sue both you and the business. And it may be easier to collect from you personally than from a distressed business. You may have signed the guarantee during the bank application and forgotten all about it. But if you did it still holds you liable. If you default on a loan your personal credit score may be damaged too.

4. Read the contract for defenses

Once you know the deadline for your reply to the lawsuit and you are sure that the plaintiff is really the owner of the loan you can look for possible defenses. If you read your contract with FinWise Bank carefully you might see that it has a clause that requires you to go to arbitration in case of a dispute. For example, the small-business owner in Broussard v. FinWise Bank had two commercial loans, the first being for $100,000. The loan documents included a clause requiring arbitration. The case was stayed while the parties handled arbitration.

Also check the timing: in Utah a bank has six years to sue for money on a written contract. If the lender waits too long the court may throw out the case. But that time limit may be renewed if the debtor has made a payment or, in writing, acknowledged or promised to pay the debt. Don’t count on the Fair Debt Collection Practices Act, though: it was written for consumer debts, for personal, family or household purposes. Business debts tend not to be covered by the law.

5. Choose your way out

Once you are sure of the deadline, the lawsuit owner, the loan type and any defenses you may have against the lawsuit from FinWise Bank you will be in a good position to decide what to do about the lawsuit. Your decision will depend on your own circumstances. In general, though, your options will be to settle for a lower amount, restructure the debt with a less burdensome payment plan, or declare bankruptcy and try to discharge the personal guaranty. A settlement allows you to pay less to the bank and move on. But the IRS may count the forgiven debt as taxable income. If you are insolvent at the time your lender cancels the debt you might not have to pay taxes on the canceled debt. But you must claim the exemption when you do your taxes with IRS Form 982. Check with a tax adviser to be sure.

Once you choose an option it’s important to act sooner rather than later. A small misstep when you are struggling to stay afloat financially can close your business for good.

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.