IOU Litigation: 5 Reasons Default Judgment Is the Real Risk

Getting sued can be unnerving, especially if it’s over an informal IOU for the loan of money or something else. But if you get a summons, don’t ignore it. Otherwise you could face a default judgment, in which a court will rule against you because you failed to defend yourself. If you’ve been served and this happens, you’ve lost the opportunity to argue your case.

Consumer debt collection suits in the courts studied ended in default judgments against defendants in more than 70 percent of cases, according to a Pew Charitable Trusts report.

1. Silence counts as admission

In some states, not answering the summons is considered admitting that all of the allegations the plaintiff made in the complaint are true. You usually get the opportunity to answer the complaint, tell your side of the story, and argue why you do not owe the debt or why you should pay less than what’s claimed. If you fail to appear, you give up that chance to defend yourself.

Time deadlines in litigation are critical and have to be followed in order for the courts to hear your case. If you miss the deadline or fail to comply with what the summons requires, you could lose your day in court. In that case, the plaintiff will win the lawsuit simply because you didn’t appear and put up a fight. Typically you’ll have only 20 or 21 days to appear in court or respond by filing a formal answer.

Once the filing and appearance deadlines have passed, all bets are off. Generally, a corporation can’t be represented by a non-lawyer, so if your company is sued it would need to hire a lawyer to prepare an answer. To avoid being completely shut out of the legal process, it’s best to answer the summons rather than not appear.

2. The amount is decided without you

If the defendant doesn’t show up, the plaintiff may be able to get a judgment entered for the amount asked for in the complaint. You won’t get to argue that you paid back the loan or that you don’t owe the debt. You also won’t get to challenge the amount the plaintiff claimed you owe.

A judgment on a claim for a fixed sum, like an IOU, is easy to get, with the clerk entering judgment on the plaintiff’s sworn statement alone, for that sum plus costs. For claims with unclear damages, a separate hearing where the plaintiff can prove the damages, with no defense from you, is necessary.

3. It reaches what you own

With a default judgment in the plaintiff’s favor, the plaintiff could collect by garnishing your wages or seizing your bank account. Depending on your state, they may even be able to seize your property to satisfy the judgment, even your house. The amount the plaintiff can take from your check is limited by federal law to 25 percent of your weekly disposable earnings, and less for low earners.

In many states, a judgment against you creates a lien against your property. If the plaintiff is able to get a lien, he could eventually force your property into a sheriff’s sale so that the sale proceeds could go to satisfy the judgment.

A lawyer for the plaintiff could send you questions under oath to find out what you own that the plaintiff can collect. If the plaintiff determines that you have certain financial assets, a lawyer can submit requests to courts to force banks to hand over money you have in your accounts. They can try to get money from anyone who owes money to you. If the plaintiff can find PayPal accounts in your name, they could go after that money too, even if you weren’t expecting them to find it. The plaintiff’s lawyer could also look for other financial assets that you own, such as brokerage and crypto accounts, cars and stocks and bonds. These can all be seized or have liens placed against them in order to satisfy the judgment debt. In some states, the plaintiff could try to get your ownership shares in a business seized or liened. That could be devastating to a small business.

4. It follows you for years

A judgment is a valid legal document. The expiration date for judgments varies by state and type of judgment. A judgment remains enforceable for long periods of time and can sometimes be renewed or revived. For example, a judgment lasts 10 years in California. A debt plaintiff can renew a judgment against a business as many times as she likes. And under California law, the unpaid principal keeps earning 10% interest a year. An individual or business may try to collect on the judgment and come after your money again and again. It can sometimes even be enforced in other states.

5. Undoing it is hard

Even though the judgment was obtained by your mistake (by not showing up), once you have been defaulted, it can be difficult to correct. Once you lose by default, you usually have to get the default judgment reversed by filing a motion with the court, to overturn it, on the grounds that your failure to answer the lawsuit was the result of “mistake, inadvertence, surprise, or excusable neglect.” That is not an easy bar to meet, and the result is not assured. In many states the deadline for removing or reversing a default judgment is extremely short, sometimes about 10 days. In California it’s available up to six months after the judgment. In federal court, such relief is available up to one year after the judgment. If you miss the deadline or don’t follow the other requirements for filing, your motion to reverse the default could be dismissed.

If you are sued, take it seriously. Hire a lawyer and present your case. If you try to blow off the summons, you could be setting yourself up for a nasty legal surprise.

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.