How Does a Lawsuit by a Debt Collector Affect Credit Scores?

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How Does a Lawsuit by a Debt Collector Affect Credit Scores?
How Does a Lawsuit by a Debt Collector Affect Credit Scores? (Image: 2007 bloomsberries / Creative Commons)

Many debtors are shocked to find judgments on their credit reports, along with a lowered score. It's important to realize that the negative judgment, not the lawsuit itself, is the culprit that leads to lowered scores. There are ways to fix these consequences, but they take a bit of time and judicial effort.

Significance

Lawsuits filed by debt collection companies don't have a negative impact, but the judgments stemming from them do. Once a negative judgment is reported to the credit agencies, a debtor's credit score takes a hit. In addition, the negative record and lower credit score may cost thousands of dollars over the years in additional fees and interest for loans and other financial products. These black marks are hard to correct; many judgments happen completely under the radar, with the debtor having no idea that a court case is pending.

Features

It's useful to realize that most of these cases end in default judgments, an outcome that is favored by the collection agencies in order to lessen overall costs and improve chances to collect cash. In a court case filed by a debt collector, the collection agency put the suit through a court in the debtor's vicinity. Many times, the agency mails legal papers to old addresses and the defendant (the debtor) never knows about the suit. In these cases, the defendant does not show up to defend himself, and the default judgment is entered. From that point, the judgment becomes public record and ends up on the debtor's credit report. In cases where the debtor knows about the suit, she may ask the collector to prove the debt. Without this proof, the case is thrown out. Many times, the agencies don't have the receipts or papers proving the defendant's ownership of said debt. At that point, there's no negative repercussions on the credit report whatsoever.

Time Frame

It takes a while for a lawsuit to have a negative impact on a credit report. Since the lawsuit must run its complete course before this can happen, it could be six months to a year before it shows up. Once again, there is only a negative effect if the suit is judged in the plaintiff's favor. Until that happens, there are steps that a person can take to resolve the debt and come to some sort of out-of-court resolution. Ignoring a lawsuit may make things speedier, but it will also create more problems down the road. Fixing judgments after the fact is time-consuming and difficult, with the added hassle of contacting the credit bureaus to have to the mark removed from your records. It's better to handle things as quickly as possible to avoid even more complications.

Size

There is no set number of points lost for a negative judgment. Points deducted are based on different factors. Of course, many people wish to fix their credit report demerits. However, this may actually trigger lawsuits from other companies, since creditors may check reports at any time while they have business with you. According to BadCreditAdvisor.com, "one of the things [collection agencies] use is credit score range based partitioning or segmentation. The higher your scores, the harder they will try to collect and sue for garnishment or whatever, as long as you are within the [statute of limitations]. If your credit scores are low, debt collectors may not even bother to look at you, so it is wise to stay in the bottom segments of credit score range."

Prevention/Solution

As stated above, the best thing to do in the event of a debt collection lawsuit is to respond quickly and decisively. This way, the credit score question is rendered moot. If this can't happen, there are ways to roll back a judgment. People who can't afford an attorney may be able to use Legal Aid Society services, since many chapters deal with consumer debt. These services are free or low-cost, and available to just about everyone. Prevent problems before they happen by regularly checking your credit report. Since each bureau guarantees one free credit report a year, obtain one every few months and read up on your history. If anything has been dragging on a dangerously long time, contact that creditor and see what you can do to pay off the debt. Working proactively to manage debt will help to avoid costly mistakes in the end.

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