Wells Fargo Business Debt Lawsuit: 5 Things to Do First

If your business is being sued by Wells Fargo over a business debt, don’t panic. The clock starts ticking as soon as the lawsuit arrives. You must answer, and it is absolutely critical to get your answer filed. If you do not, you can lose by default and judgment can be entered against your business. It is vital that you act immediately with the first notice. The longer you wait, the less options you have to protect your business.

1. Find your deadline

The lawsuit you were served should have a “Summons.” Find it and review it carefully. It will tell you your deadline to file an answer. Importantly, you also need to figure out where the case has been filed, in state or federal court. In federal court, you generally have 21 days to formally answer the lawsuit after being served. The time period for an answer to a debt lawsuit can vary significantly so it is important that you check with the court. Responding does not mean admitting that the debt is yours or that it is valid, merely that you want to have your defenses heard, and be present in court if necessary.

2. Know what silence costs

Business owners sometimes ignore the lawsuit believing it will go away on its own or that creditors will forget. If the summons goes unanswered, the plaintiff may ask the court to enter a “default judgment” or a monetary judgment in the plaintiff’s favor. It becomes more difficult to fight a lawsuit once judgment has been entered so do not let this happen. A default judgment can cover the amount the bank claims it is owed, plus collection costs, interest and attorney fees. Depending on state law, a judgment can lead to the garnishment of wages and the seizure of business and personal property. You may even be hit with a judgment lien. If you have a judgment against you or your business, it can affect your credit, and make it much more difficult to find financing.

3. Check whose name is on it

If your business has been sued over a debt, you need to check the name of your business on the lawsuit paperwork. If your personal name is on it, you may have a liability issue and could have personal property and income in jeopardy.

If you are a limited liability company, the business structure can help shield your personal assets. You will also need to watch out for any personal guarantees of a debt made in a loan agreement. A personal guarantee can make you personally responsible for the debt. If you are unable to pay, your personal assets can be used to satisfy your debt. In one Wells Fargo business credit card agreement, the personal guarantor is personally liable for the entire account debt and can be held accountable if the business does not pay. The bank is allowed to collect from the guarantor before collecting from the business.

Most commercial guarantees are a guaranty of payment, not a guaranty of collection. That means the lender can usually go straight to the guarantor and sue. The agreement may also say that in case of a split ownership the lender can pursue any one of the owners for the full amount, known as joint and several liability.

4. Get a lawyer for the company

It is so important to have legal representation when your business is being sued. Corporations and LLCs must hire counsel in federal court. A lawyer can help you find solutions tailored to your specific situation. At the very least, you have someone who can tell you what your risk exposure is. If you are the guarantor on a business loan or credit agreement, an attorney can review the agreements with you and explain your legal obligations.

Also, avoid the mistake of thinking business debt has the same consumer protections as personal debt. The federal Fair Debt Collection Practices Act covers only debts for “personal, family or household purposes.” Business debts are generally not covered.

5. Read your agreement closely

Take a look at your credit or debt agreement and read the fine print. It can give you important details like your liability and obligations as well as your rights as a debtor. See what it says about default terms. If you miss a payment or default for another reason, Wells Fargo’s business card agreement says the bank can demand immediate payment of the full balance. The borrower must also pay the bank’s collection costs, attorney’s fees and court costs. Also of note in a Wells Fargo commercial account agreement from 2014, the bank reserved the right to take money from the business’s Wells Fargo accounts to the extent allowed by applicable law.

A lawsuit is not the end of the road for your business. You have the option to file an answer to the complaint and defend your business. Alternatively, in most cases, the automatic stay created by a bankruptcy filing will halt a lawsuit or the collection of a debt. In Chapter 7, while it lasts, creditors generally cannot start or continue lawsuits, wage garnishments, or even phone calls demanding payment.

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.