Lending Club Business Debt Lawsuit: 5 Things to Do First

If you’re being sued by Lending Club, don’t ignore it. You usually have 20 to 30 days after service of a summons and complaint to answer. Find and hire a lawyer, gather your documents, and consider settling if you’re able.

1. Find your answer deadline

Whether you were given the legal papers in person or it got posted on your door, find your deadline to respond. Mark the date on your calendar and consider adding an alert to your phone. The exact time limit can vary. Federal court, for example, generally gives you 21 days after being served to answer. States set their own deadlines, often 20 or 30 days depending on how you were served, and the summons tells you how much time you have.

2. Get a lawyer to answer

You’ll need to file an answer with the court. If you ignore a lawsuit by failing to answer or file a motion within the time limit you got after service, the creditor can ask for a default judgment. This is a win in court that the lender can use to freeze bank accounts, put a lien on property, and garnish what customers owe you, without ever getting a trial.

An attorney will write a formal answer to the lawsuit for you, usually in a single legal document. The answer will say whether you’re challenging the allegation and whether you’re bringing any counterclaims. A corporation may only appear in federal court through a licensed attorney. For instance, the owner of a business that got sued must hire a lawyer to represent the company.

3. Pull every loan document

Get out all the paperwork relating to your loan, including any loan agreements, payment statements, and any correspondence. Start with the promissory note - which is basically your loan contract. This document says how much money you got, the interest rate, and when payment is due, but it also says what can happen in case of default. Give your lawyer everything you have.

In addition, locate the personal guarantee and the UCC filings. Look for every email, letter and notes of phone calls you got from Lending Club. And if you have a call scheduled with anyone from the lender, be sure you don’t say anything that admits liability. Anything you say on the phone can be written up into a memo and may show up later as an exhibit in the lawsuit.

Many loan agreements contain a “forum selection clause.” These provisions say where you have to defend a lawsuit. Forum-selection clauses are not always enforceable, however, and the issue may be one worth pursuing in court.

4. Read your personal guarantee

If you signed a personal guarantee for the debt, you’re personally responsible to pay it in case the business defaults. Read this carefully to understand the terms - which likely say that this agreement is separate from the actual loan. So you won’t necessarily get out of the personal guarantee if the business files for bankruptcy. This can expose your personal assets to claims by the bank or other lender. A personal guarantee can lead to wage garnishment but the amount that can be garnished depends on the circumstances. Federal law caps wage garnishment at 25% of your disposable weekly earnings or the amount by which your weekly wages exceed 30 times the federal minimum wage, whichever is less.

Most places, a lender can’t levy on your bank account without a court judgment. However, it can request an attachment from the court if there is reason to believe that you are hiding assets. If you try to move funds, the bank may claim this is a “fraudulent transfer” in its court papers. Speak with an attorney before moving any money.

5. Weigh your way out

With a lawyer, you should look for some defenses. Maybe this claim is too old under the statute of limitations (often 4 to 6 years for written contracts). Maybe you weren’t sent a default notice as required by the contract. Maybe your lender’s actions improperly accelerated the entire balance due before it was owed. Or maybe your lender breached the agreement. Any real defense to some or all of the claim can give you leverage to settle.

As for how the lender collects, the federal Fair Debt Collection Practices Act only covers personal or household debts, not business debts. But deceptive tactics may be illegal under other laws, such as state statutes governing commercial collection practices.

You have a chance to negotiate with the bank or lender to settle this case at any stage. Many commercial loan lawsuits settle before trial. A compromise can mean a reduced balance, a partial payment plan, or even a dismissal of the action altogether. A lender’s willingness to settle depends on the strength of its case against you, how able you are to pay, how much it will cost the creditor to keep litigating, and whether you have any defenses.

Don’t think you’re getting out of taxes if you manage to settle for less. You usually have to report the amount of forgiven debt as income. However, you can exclude up to the amount you were insolvent. You’ll claim the insolvency exclusion on IRS Form 982.

If settling won’t work out, it may be time to think bankruptcy. Filing a bankruptcy petition can result in an “automatic stay” on the lawsuit against your business. However, it won’t necessarily stop collection activities on a personal guarantee. Speak with an attorney to see whether filing for bankruptcy is right for you.

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.