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A Guide to Doing Your Taxes for the Very First Time

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Filing taxes can be intimidating no matter how many times you’ve done it, but it can be especially challenging if it’s your first time.

What documents do you need to collect? What information do you need to report? What deadlines do you have to meet? What if you make a mistake?

It’s a lot to keep track of and there’s a fair amount at stake as well. Accurately filing your taxes will not only help you avoid potential penalties, but it will ensure that you get the maximum refund possible.

This article will guide you through the entire process so that you know how to successfully file your taxes for the first time.

How to decide whether you need to file a return

Not everyone needs to file a federal income tax return, though if you worked for any significant part of the year, it is likely that you do.

You generally need to file a tax return if you earned more than the standard deduction amount, which for 2018 is $12,000 for single filers, $24,000 for married couples filing jointly and $18,000 for anyone filing as head of household. If you’re claimed as a dependent on someone else’s tax return, such as your parents, you generally need to file a return if you made more than $1,050 during the year.

But even if you don’t meet those thresholds, there are still situations in which it may make sense to file a return.

“If you paid federal and state withholding taxes, you would need to file a return in order to potentially get a refund,” said Chris Panek, a CPA in Avon, Minn.

You also need to file a return to qualify for certain tax credits, such as the Earned Income Tax Credit (EITC), which can put a significant amount of money back in your pocket if you’re working but earning a low income.

At the end of the day, it’s often worth filing unless you’re absolutely certain that you don’t need to file and that you won’t qualify for a refund or any tax credits.

“There’s no risk to filing a return,” said Panek. “You need to file a return in order to potentially get a refund, and if you do file a return and didn’t need to, there shouldn’t be any risk at all.”

If you’d like some help deciding whether it’s worth filing a tax return, you can use the following tool provided by the IRS: Do I Need to File a Tax Return?

The tax filing deadlines you need to meet

April 15 is the standard tax filing deadline, but that date can be adjusted for weekends and holidays. In 2019, the tax filing deadline is April 17.

Meeting this deadline is critical because failure to file on time can have several negative consequences.

First, you may be subject to a failure-to-file penalty, which is typically calculated as up to 5% of your unpaid taxes for each month that you’re late, with a maximum penalty of 25% of your unpaid taxes.

Second, if you haven’t paid your taxes in full by the deadline, you may be subject to a penalty as well, typically calculated as 0.5%-1% of your unpaid taxes for each month that you’re late, though the combined failure-to-file penalty and failure-to-pay penalty can’t be more than 5% in any given month.

Finally, you won’t receive your refund or be able to claim tax credits unless you file. You do have three years from the original due date in order to file and claim a refund, but, again, waiting can subject you to penalties, and in any case receiving that refund earlier is better than receiving it later.

If, for whatever reason, you are having trouble filing an accurate return by the April 17 deadline, you are allowed to request an automatic six-month extension that gives you until Oct. 15 to file your return. There are no eligibility requirements to get an extension, and requesting an extension by April 17 will allow you to avoid the failure-to-file penalties as long as you meet that Oct.15 deadline.

It’s worth noting, however, that the extension only applies to the filing of your return and not to the payment of your tax liability. You still need to pay in full by April 17 in order to avoid the failure-to-pay penalty.

“I would highly recommend that you get your return done by April 15,” said Panek. “A lot of times people aren’t thinking about their taxes by the time extensions are due, and if you do owe money, that’s still due on April 15.”

How to collect and organize the necessary tax documents

One of the most confusing parts of filing your taxes, especially the first time around, is knowing which tax forms you need to collect, when you should expect to receive them and how to keep everything organized so that you’re ready when it’s time to put it all together.

The first step is to simply have a basic system for keeping everything organized so that whenever you do receive a document, you’ll have somewhere to keep it.

“I definitely recommend to clients, especially if they’re getting a lot of documents in the mail, that they keep a folder where they can keep them all,” said Panek. “Every time you receive something, put it in that folder and just let it accumulate so that when [you] start your return, you have all of it ready to go.”

According to Panek, most tax documents have to be sent out by Jan. 31. That includes W-2s that report your earned income from your employers, 1099-INTs that report interest earned on your bank accounts and 1099-DIVs that report dividend income earned from your investments.

Other forms you might need to collect, depending on your situation, include:

  • Form 1098 – Reports mortgage interest paid during the year.
  • Form 1099-MISC – Reports income earned as an independent contractor.
  • Forms 1095-A, B and C – Reports on your health insurance coverage.
  • Form 1098-E – Reports on student loan interest paid during the year.
  • Schedule K-1 – Reports income earned as part-owner of a business. According to Panek, these forms typically aren’t required to be sent out until March 15.
  • Receipts for charitable deductions, medical expenses and child care expenses that could potentially be deductible.

While you don’t want to wait until the last minute to file your taxes, Panek recommends that you do give it some time so that you can be sure you have everything you need before starting the process.

“You want to make sure that you have all your forms before you file so you don’t have to go back and amend that return,” said Panek. “Since everything is sent out by Jan. 31, it wouldn’t be beneficial to file your taxes before then unless you’re absolutely sure that you have all the forms you need.”

How to file your taxes

Once you’ve decided that you need to file a return and you’ve collected all the documents you think you’ll need, it’s time to file your taxes.

There are a few different ways to go about it, and the right choice depends on the specifics of your situation.

Option #1: IRS free e-file

If you make $66,000 or less, you are eligible to use the IRS’ free tax-filing software that guides you through the process of filling out the return. If you make more than $66,000, you can use the free fillable forms offered by the IRS, though you won’t have the benefit of software to guide you through them.

If your income is low enough to qualify for the free software, and if your overall tax situation is relatively simple, this option may be a no-brainer.

“This can be great if you have a simple return, meaning that you’re simply getting a W-2 from your employer and you potentially have some simple investments,” said Panek.

The fillable forms can also be useful, but Panek warns that since you don’t receive the same kind of guidance, it’s a better option for people who have a stronger foundation in taxes.

“A lot of people will use the free services when they understand the tax law,” said Panek. “But if you are filing a return and you’re not sure about what you should be entering in, I would seek out a professional tax preparer to help you out.”

Option #2: Tax preparation software

If you don’t qualify for the free IRS e-file option, and if your situation isn’t complicated enough to hire a professional tax preparer, paying for tax preparation software may be a good middle ground.

The cost of tax preparation software ranges from just a few dollars to almost $200, depending on the complexity of your situation. And while you don’t get the expertise of a professional reviewing your situation, you do benefit from more guidance than you would get if you filed your taxes on your own.

“The software will guide through some questions to help you understand what you need to report,” said Panek. “If you have a simple enough return and you feel comfortable with the software, it’s fine to do this on your own.”

Option #3: Professional tax preparer

If you have a complicated tax situation, are unsure about anything in your return, or if you’d like a little guidance about how to minimize your tax payments, it may be worth paying to work with a professional tax preparer.

“Whenever you feel that your tax return is getting more complicated, or you’re unsure of how you should be adjusting things within your tax return, I always suggest that you seek out a professional,” said Panek. “The nice thing is that they’ll be able to sit down with you and go more in-depth, and they may ask questions that otherwise wouldn’t come up.”

In addition to making sure that the current year’s return is done right, Panek said that a professional tax preparer could help you make decisions like how much to contribute to your employer retirement plan next year by showing you exactly how those contributions would affect your return. If you’re starting a business, a tax professional could also make sure that you set it up properly with a tax ID and help you understand which expenses are deductible.

The biggest downside to working with a professional is the cost. It can vary a lot depending on the type of professional you use and the scope of service you need, but it will almost certainly cost more than using tax preparation software.

Still, Panek says that in many cases, the cost will be worth it and that it may not be quite as burdensome as it seems on the surface.

“If you’re looking at something like TurboTax, the dollar amount that you’re spending on the software could go right to the person you’re paying to prepare your taxes,” said Panek. “A tax preparer can even first help you with the question of whether you need to file, and then you can decide whether you want to hire them to help you out.”

There are a number of factors to consider when hiring a tax preparer, and the IRS offers two useful resources to help you make a good decision:

When you can expect a refund

One piece of good news when it comes to filing taxes is that if you’re owed a refund, you will typically receive it fairly quickly. According to the IRS, most refunds are issued in less than 21 days and you can check the status of your refund within 24 hours of filing an electronic return.

“It varies in terms of how fast they come back and what you have going on in your tax return,” said Panek. “But I’ve had people who have gotten their refunds back by the next week.”

You can choose to receive your refund either via mail or by direct deposit into your bank account. According to the IRS, choosing direct deposit is both more secure and it allows you to get your refund quicker. You can even choose to split your refund among three different bank accounts if you’d like.

Of course, while it’s always nice to receive a big chunk of money all at once, there’s plenty of debate over the benefits of a refund compared with reducing your withholding so that you receive more money in your paychecks over the course of the year.

On the one hand, getting that refund can help you pay off debt, build savings or fund a college savings account in one fell swoop. On the other hand, a big refund means that you’ve essentially been loaning the government money for the past year, money that could have been yours to do with as you pleased.

“Some people that rely on that big refund because they’re not savers and they would rather have the government save that money for them,” said Panek. “Other people don’t want their money anywhere else. If there’s money that should be theirs, they want to be saving it themselves.”

“I personally like to get my clients as close to their actual tax liability as possible,” added Panek. “That way, they’re not getting a big refund and don’t owe a big tax bill.”

If, after filling out your taxes, you feel like your refund was either too big or too small, you can fill out a new W-4 and submit it to your employer so that they can adjust your withholding up or down. The IRS can help you figure out how to make those adjustments with their Paycheck Checkup tool.

Other common tax questions

Every tax situation is different, so you may still have questions even after reviewing all of the information above. The IRS offers a helpful FAQ that addresses many of the most common questions, and here are a few more answers that may point you in the right direction.

How will the new tax law affect me?

With the 2018 tax reforms in effect, one big question is how the new rules will affect your personal tax return.

The truth is that there are a lot of variables in every tax return, so there’s no way to say for certain how you will be affected. For example, a higher standard deduction will largely help people who don’t itemize their deductions, but a stricter limit on state and local tax deductions may hurt people in high-tax states, such as California and New York.

On the whole, income tax brackets have largely been decreased, which means that many people may see at least a small decrease in their tax bill compared with recent years. But the only way to know for sure is to do your taxes as accurately as possible and see where things land.

How can I reduce my tax liability?

There aren’t many ways to reduce your tax liability after Dec.31, but you do have until April 15 to make traditional IRA contributions for the prior year and those contributions are deductible on your tax return.

If eligible, you can contribute up to $5,500 to your IRA for 2018 (it’s $6,500 if you are age 50 or older). If you’re married, your spouse can potentially make another $5,500 contribution, allowing you to reduce your taxable income by as much as $11,000.

How do I pay taxes I owe?

If you file your return and find out that you owe taxes, remember that you have until April 17 to make that payment, or else you may be subject to penalties.

The IRS offers several different ways to pay, including paying directly from your bank account, by debit or credit card, or sending in a check.

What if I can’t afford to pay?

If you can’t afford to pay the taxes you owe, you can file an online payment agreement that may allow you to delay payment for up to 120 days or to create an installment plan so that you can make payments over time. You can also call the helpline at 800-829-1040 to discuss your options with a representative.

File without fear

Although filing your taxes for the first time can feel overwhelming and intimidating, the truth is that there’s not much to fear. The main potential penalties are associated with not filing, and as long as you meet the deadlines, there are ways to work with the IRS even if you owe money.

The keys to filing your return successfully are simply to be on the lookout for tax documents that come your way, keep them organized in a place where you’ll remember them and use whatever guidance you need in completing your return on time.

As long as you do those things, you should be just fine.

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Matt Becker is a writer at MagnifyMoney. You can email Matt here

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When Should You Consider Bankruptcy & How to File

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Updated – November 14, 2018

If you’re drowning in debt and having trouble keeping up with your payments while still handling your living expenses, you may have at least begun to consider filing for bankruptcy.

Filing for bankruptcy is meant to give people in serious financial distress some relief and a chance to start over. By the time most people get to that point, they’ve probably tried many other methods for managing their debt.

Bankruptcy certainly has its benefits, potentially allowing you to wipe the slate clean and start anew.

But there are a lot of things to consider before making a decision, from the negative consequences of filing to whether bankruptcy would even provide relief for your specific situation.

“For most folks that come in, this is the last option,” said John Colwell, a San Diego, Calif.-based bankruptcy attorney and President of National Association of Consumer Bankruptcy. “I know I’m like the dentist. People really don’t want to be sitting in front of me.”

This is a big decision that requires a significant amount of due diligence before moving forward. While it’s important not to take bankruptcy lightly, it may be the best way for people to get back on their feet.

So how do you know if bankruptcy is the right way to relieve your debt? In this post, we’ll go over some of the key points to help you get started.

The basics of filing for bankruptcy

Bankruptcy is a legal procedure to discharge debt built up by someone who either will not be able to repay those debts or does not have the means to repay debts owed currently. There are two notable forms of bankruptcy: Chapter 7 and Chapter 13.

In a Chapter 7 bankruptcy, a debtor’s nonexempt assets are sold and the proceeds are used to pay debts. An individual must pass a means test before they can file a Chapter 7 bankruptcy to ensure that the court would not be abusing the bankruptcy law by granting one. We will talk more about the means test below!

A Chapter 13 bankruptcy is a “wage earner plan.” To qualify, an individual must have a steady income. This allows them to pay back all or part of their debts by developing a repayment plan. The plans last between three and five years.

In most cases, bankruptcy does not protect you from any future debts incurred. It also will have an effect on your credit score and remains on your credit report for 10 years with Chapter 7 and seven years with Chapter 13. In a Chapter 7 bankruptcy, you may lose assets such as your house or your car depending on how much equity, if you’re able to exempt your equity and if you’re current on your payments.

Are You Eligible?

As stated above, there are two types of bankruptcy for individuals: Chapter 7 and Chapter 13.

There are some significant differences between the two programs, but here’s a high-level summary:

  • Chapter 7 allows you to completely discharge your debts, with some exceptions (such as student loans, certain tax obligations, and child support). But you may be obligated to sell some of your property to settle some of your debt obligations.
  • Chapter 13 allows you to create a payment plan to repay some or all of your debts over a 3-5 year period. So your debts are not discharged, but you will also not be obligated to sell any property in order to make your payments.

Either one could be more or less beneficial depending on the specifics of your situation. But the very first question is whether you qualify for either one, and each has its own set of criteria.

Chapter 7 bankruptcy has what’s called the “means test”, which is meant to ensure that only people who truly can’t afford their debt payments are allowed to file. There are two different wants to pass it, and therefore qualify for Chapter 7 bankruptcy:

  1. If your monthly income is less than the median monthly income in your state for your family size, you pass. You can find current median income numbers by family size here.
  2. If you don’t pass #1, you’ll have to go through a complex calculation to see whether your disposable income after subtracting out certain expenses is enough to satisfy your debt obligations. At this stage it would probably be best to talk to a professional who could help you navigate the process.

Eligibility for Chapter 13 bankruptcy is a little more straightforward. Here’s how it works:

  1. As opposed to Chapter 7, you need to prove that your disposable income is high enough to afford a reasonable repayment plan.
  2. Your secured debt (mortgage, auto loan) can’t exceed $1,149,525, and your unsecured debt (credit cards, medical bills, etc.) can’t exceed $383,175.
  3. You must have filed both federal and state income taxes each of the last four years.

There are some other requirements for each, but those are the major ones. Assuming you qualify for at least one of them, there are a few other things to consider.

What Kinds of Assets and Liabilities Do You Have?

Depending on the specifics of your financial situation, one type of bankruptcy may be preferable to the other. Or it may be that neither would actually be particularly helpful.

As an example, neither type of bankruptcy would likely help you all that much if your primary debts are student loans. They wouldn’t be discharged in Chapter 7 bankruptcy. And while your required payments might be reduced over the 3-5 year repayment period in Chapter 13 bankruptcy, once that was over you would have to continue paying them back as usual.

The type of assets you own and their value also matters, particularly if you’re going through Chapter 7 bankruptcy. During that process, your bankruptcy trustee is allowed to sell your property in order to settle your debts, but certain property is protected.

For example, your house and car are protected up to certain limits. Employer retirement accounts like 401(k)s and 403(b)s are fully protected, while IRAs are protected up to about $1 million. But other accounts, such as checking, savings, and regular investment accounts may not have the same protections.

The rules here vary by state, and having a strong understanding of which assets you might be able to keep and which you might end up losing will help you make your decision.

When to file bankruptcy

According to Colwell, filing for bankruptcy needs to be “worth your while,” meaning it should give you relief from your debts to ensure you don’t find yourself in a similar situation in the near future. That means that if you have major expenses that you are about to incur, you should wait to file until after you have incurred them so they can be included in the bankruptcy settlement. This is especially important when it comes to filing bankruptcy due to medical bills.

However, with a Chapter 13 bankruptcy, you can seek court approval to include new debt that you’ve incurred post-filing into your payment plan.

In general, though, there are aspects of your financial situation that signal when it’s time to consider bankruptcy. If you can’t pay your bills (and you don’t see that changing anytime soon) and your debt continues to pile up, bankruptcy is probably worth considering.

Here are other red flags to look out for:

  1. Debt collectors are calling. If you’re behind on your bills to the point that you’re hearing from debt collectors, it may be time to consider bankruptcy. This is especially true if you’re being sued by debt collectors.
  2. You’re in danger of losing your home. If you’re at risk for losing your house to foreclosure, filing bankruptcy can help you get caught up on your payments and keep your home. With Chapter 13, you’re given the chance to keep your home by creating a plan to repay your outstanding debt.
  3. You’re using loans to pay your bills. Using short-term high-interest loans such as payday loans can get you in trouble. With these loans, people borrow against their next paycheck. “People get caught in the trap and it starts rolling over from paycheck to paycheck to paycheck,” said Colwell. Title loans are another form of small loan where a vehicle is used as collateral; these loans can be problematic for someone already in financial distress.
  4. You’re liquidating your retirement assets. Retirement money is exempt in a bankruptcy, meaning trustees can’t use it to repay lenders. So in most cases, it doesn’t make sense to burn through your retirement money to pay debts. “I hate that with a passion,” Colwell said. “It’s your retirement money, what are you doing?!”

How to file for bankruptcy

Most initial consultations with lawyers are free of charge. At these meetings, you’ll walk a bankruptcy attorney through your financial situation and your reasons for wanting to pursue bankruptcy.

There are also ways for individuals to file for bankruptcy on their own, known as filing pro se. Court employees and bankruptcy judges can’t give out legal advice to people in their courts, so if you go that route, you will be on your own. To file yourself, you should be familiar with the United States Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and the local rules of the court.

Unless you have a strong understanding of legal issues and have the time to handle the paperwork, it’s probably best to use a lawyer — that’s because making a mistake can impact your rights, according to the U.S. Courts. You’ll also need the capacity to fill out a lot of paperwork, Colwell also noted.

If you use an attorney, they should be able to provide services including:

  • Advising you on whether to file a bankruptcy petition and under which chapter to file.
  • Telling you whether your debts can be discharged.
  • Advising you on whether or not you will be able to keep your home, car, or other property after you file.
  • Advising you of the tax consequences of filing.
  • Advising you on whether you should continue to pay creditors.
  • Helping you complete and file forms.

How to file Chapter 7 bankruptcy

A Chapter 7 bankruptcy involves the sale of all of your nonexempt assets to pay back your creditors. This is the most common kind of personal bankruptcy, accounting for more than 60 percent of all non-business bankruptcies in 2017. The process usually takes about four to five months.

Filing for Chapter 7 will wipe out your allowable debt (such as as credit card, medical and personal loan debt), but the bankruptcy will remain on your credit report for up to 10 years.

The first step is to take a mandatory credit counseling course from a government-approved organization, within 180 days of your filing date. Upon completion, you can decide if you still feel it appropriate to move forward with a bankruptcy, and move on to the next step.

At this point, you, or your attorney, would file your petition and other additional forms with the court. Along with your filing petition, the forms include a list of your creditors, a summary of your assets and liabilities, lists of property (both exempt and non-exempt) and any documentation needed for your “means test.” There are also companies that will send you a packet of all relevant documents, for a small fee.

At this point, you will be subject to the “means test.” If the debtor’s current monthly income is more than the state median, the means test is applied. Abuse is determined if the debtor’s monthly income over five years is either more than $12,850, or more than 25% of the debtor’s nonpriority unsecured debt of at least $7,700.

A trustee is then appointed to review the paperwork and take nonexempt property; you will also have to submit your most recent tax return to the trustee.

The next step in the process is a meeting of creditors, known as a “341 meeting.” At the meeting, you will answer questions about your finances and bankruptcy forms under oath. Creditors are allowed to attend the proceedings if they choose.

It is now decided if you are eligible to file for Chapter 7. At this stage, secured debts are determined: they can be repossessed by the creditor, you can redeem it by paying back what it’s worth or you can reaffirm the debt, which removes that debt from the bankruptcy filing and allows you to pay it back when the bankruptcy is over.

You will have another course to attend that will include information on developing a budget, using credit and managing money — afterward, your debt will be discharged.

Cost: A Chapter 7 bankruptcy needs to be paid for upfront by the debtor. It is generally a flat rate and may be contingent on the complexity of your debt structure as well as the market in which the attorney is operating.

How to file Chapter 13 bankruptcy

A Chapter 13 bankruptcy will last between three and five years, from start to finish. These processes are long and complex, so it’s strongly recommended that you use a lawyer. If you have a steady income, Chapter 13 bankruptcy allows you to keep property, like a house or car, that you might otherwise lose in Chapter 7. Chapter 13 develops a three-to-five year repayment plan for your debts.

The first step is to take a credit counseling course. Afterward, you or your attorney will prepare and file a bankruptcy petition and paperwork that includes a list of your creditors, a summary of your assets and liabilities and your Chapter 13 repayment plan; you will also need to provide your most recent tax returns.

The court will later appoint a trustee to administer your case and a stay on collections will take effect — this means that certain creditors won’t be able to proceed with lawsuits against you, call you for repayment or garnish your wages. You’ll begin making payments for a month after you file the paperwork. In addition, like Chapter 7, Chapter 13 also requires a 341 meeting.

You or your lawyer must attend a confirmation hearing where objections to your plan either by the trustee or the creditors will be addressed and eventually your plan for repayment will get confirmed.

Your creditors will also file proof of claim so that they can get repaid; it is at this point that you can object to the claim if you feel it is unfair.

The repayment period begins when you start to comply with your plan’s requirements and payments; this is the longest portion of the bankruptcy. If required by your plan, you may also have to submit documents to the court like income and expense statements.

Exactly as in Chapter 7, you’ll have another course to attend that goes over budgeting, using credit and managing money. Afterward, your debts may be discharged and your case closed.

Cost: There are two ways an attorney can charge you for handling your Chapter 13. It may be a “no look” fee, a flat fee set up by the district in your state, or they can bill you hourly. Your payment to your attorney can be worked into your Chapter 13 repayment plan.

Conclusion

Filing for bankruptcy is a big decision, and in the end you’re the only one who will know what’s right for you.

Bankruptcy can be not only a long process, but also a very emotional one for those seeking to discharge debts.

Do your research, evaluate all of your options, and then make the decision that most helps you reach your personal goals.

Looking into your options sooner rather than later may help you shore up your financial future and lose less in the long term.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Matt Becker
Matt Becker |

Matt Becker is a writer at MagnifyMoney. You can email Matt here

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Kate Rockwood is a writer at MagnifyMoney. You can email Kate here

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What To Do If You’re Being Sued For Debt

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

debt lawsuit

If you’ve stopped making payments on a debt, and it’s been in collections for a while — and especially if you’ve been avoiding the debt collector’s attempts to contact you — it’s possible that you may get sued for that debt.

Not all unpaid debts will end in a lawsuit. Debt collectors are able to continue collection actions indefinitely, and only in certain cases will a lawsuit ever materialize.

“It’s always going to be a cost-benefit analysis by the creditor,” said Ed Boltz, a consumer debtor’s attorney in North Carolina. “The bigger the debt, the more likely it is that you’ll be sued. And when you owe money to an individual or small business, you are far more likely to be sued because they tend to take that debt personally.”

Being sued for debt can be a scary and intimidating process, but this article will help you understand how it works and what you can do to contest the charges.

What happens when you’re sued for debt

One of the keys to successfully challenging a lawsuit is simply understanding how the process works so that you know what to expect and how to respond.

The bad news is that you’ll have to do some leg work to get up to speed on the particulars for your state, as the specifics vary based on where you live.

“The details depend tremendously on what state you’re in,” said Boltz. “The process in North Carolina is different than the process in South Carolina, which is different than it is in California.”

The good news is that there are a few general steps that apply to most situations.

Timeline: When you’re sued for debt

What happens

What it means

Creditor files a complaint with the court

This officially begins the lawsuit. The complaint explains the charges against you.

You receive a summons and the complaint

The summons provides a deadline for your response.

You file an answer

This begins your defense and avoids a default judgment against you.

There is a trial or the case is dropped

The creditor can either drop the lawsuit or it will go to trial, typically in small claims court.

A judgment is made

The judge makes a decision, which will either relieve your responsibility or allow the creditor to begin collection actions.

Creditor files a complaint with the court

The lawsuit starts when the creditor files a complaint, typically in state court.

“Credit card debt, medical bills, those sorts of debt are sued in state courts,” said Boltz. “People are very rarely sued for debt in federal court.”

The complaint primarily explains who the creditor is suing, what debt they’re suing for, and how much they think you owe.

You receive a summons and the complaint

Once the complaint is filed, you’ll receive both the complaint and a summons that typically requires you to respond within 30 days. According to Boltz, these are usually mailed to you, though they can sometimes be delivered by a law enforcement officer or process server.

Boltz also warned that trying to avoid the delivery of these notices is a bad idea.

“A lot of people, if they’re sent the summons by certified mail, will attempt to ignore it and refuse to accept their mail,” said Boltz. “But all that ends up happening is that they have to get service to you through some other means, whether that means sending someone to your home or work or even putting it in the newspaper, all of which can be even more embarrassing.”

You file an answer

Once you receive the summons, Boltz said, you typically have 30 days to file an answer with the option to request an extension for another 30 days.

You will now have your chance to respond to the creditor’s claims and begin mounting a defense, and it’s at this point that Boltz recommends consulting with an attorney.

“The first thing you should do when you’re sued is go talk to a lawyer,” said Boltz. “That’s the best way to find out what your rights are and whether you have valid defenses against that lawsuit.”

It’s important to understand that even if you don’t have a good defense, it’s still important to file a timely answer. Refusing to answer will typically lead to a default judgment in favor of the creditor, at which point they may be able to garnish your wages, place a lien on your property or freeze your bank account in order to collect on the debt.

“The bottom line is that you can’t hide from the problem,” said Boltz. “The best thing to do is address it.”

There is a trial or the case is dropped

Once you file an answer, there’s a chance that the creditor may simply drop the lawsuit.

“It’s possible that the creditor will dismiss the lawsuit and decide not to proceed,” said Boltz. “They may do the cost-benefit analysis and decide that it’s not worth moving forward.”

Of course, they might not drop the lawsuit, and the case will go to trial. Boltz explained that most suits are handled in small claims court and follow a relatively standard procedure:

  1. The plaintiff (i.e. the creditor) presents their evidence.
  2. You are allowed to cross examine any witnesses they call.
  3. You present your evidence to either show that the debt is not yours, the amount is not correct, the statute of limitations has passed or any other defense.
  4. The plaintiff is allowed to cross examine your witnesses.
  5. Each side presents its closing argument.

A judgement is made

Once each side has made their closing argument, the judge — or, in rare cases, the jury — makes a decision and hands down a judgment.

If you win the judgment, by law you are no longer responsible for that debt. Unfortunately, that doesn’t mean that you’re 100% in the clear in terms of dealing with collection activities.

“The problem with debt collection is that often that debt will be sold to another debt collector who may or may not know that you’ve won that lawsuit,” said Boltz. “They may try to collect on it again, but at that point they’ve clearly violated the law, and you may be able to countersue and get some damages from them.”

If you lose the judgment, the creditor will have the right to begin collection actions against you. Depending on the state in which you live, that could include garnishing your wages, placing a lien on your home or other real property and even garnishing funds or freezing your bank account.

According to Boltz, judgments are good for 10 years and can be extended for another 10 years, and any unpaid amounts will sit there and accrue interest. So even if your home doesn’t currently have enough equity to cover your debt, the creditor can place a lien on your home, wait it out, and eventually either force you to sell once you do have enough equity, or demand repayment when you decide to sell it yourself or refinance your mortgage.

5 steps to take when you’re sued for debt

With that much on the line, what can you do to give yourself the best chance to win the lawsuit and avoid those collection actions?

Here are five steps you should take if you’re sued for debt.

1. Read the summons and complaint

First things first: Accept delivery of the summons and complaint and read them both thoroughly. Ignoring them will only lead to a default judgment against you, while reading and understanding them will help you meet deadlines and mount a convincing defense.

“When you get those papers, make sure you read them,” said Boltz. “Hiding from them doesn’t do you any good and is only likely to make you owe more money later on.”

Here are some important questions to ask as you read them over:

  • Who is suing you?
  • What is the debt they are suing you for?
  • How much are they claiming you owe?
  • Where has the suit been filed?
  • What is your deadline for filing an answer?
  • Where does that answer need to be filed?

2. Review your documentation

Once you know what your creditor’s suing you for, you can review your own documentation about that debt.

You may find that it’s not actually your debt, in which case you have a strong defense. And even if it is your debt, any information you have about when you took it out, payments you made and balances you owed will be helpful.

3. Consult an attorney

According to Boltz, hiring an attorney will give you the best chance to successfully challenge the lawsuit by making sure that you explore all possible angles.

“There are all kinds of valid defenses, from something as basic as ‘This isn’t my debt’ to something more complicated, like an application of the statute of limitations,” said Boltz. “A lawyer may also be able to find out that some of the ways in which the debt collection and the lawsuit were done were wrong, and you may have counterclaims against them.”

The Consumer Financial Protection Bureau suggests trying to find legal aid in your area, so be sure to look into opportunities to obtain free legal advice.

4. File an answer

No matter what, you want to file an answer by the deadline indicated on your summons. This allows you to avoid default judgment and gives you the chance to challenge the lawsuit in front of a judge.

5. Show up to court

Finally, if the lawsuit is brought to court, you need to show up and present your defense, no matter what. Again, showing up is the only chance you have to defend against the lawsuit and avoid a default judgment — so it’s an important step, even if you think your odds are low.

What to do if you’re held responsible for the debt

“If you get a judgment against you, you need to figure out how you’re going to pay it,” said Boltz. “Whether that’s by repaying it, negotiating a settlement, refinancing your home or filing bankruptcy.”

If you find yourself in this situation, check out some of MagnifyMoney’s free resources to help you evaluate your repayment options, including a guide to debt repayment, an overview of debt consolidation options and tips on how to negotiate a settlement on credit card debt.

In some cases, bankruptcy may even be the right move.

“If this is one part of a larger financial problem, bankruptcy may be the better financial option because it wipes the slate clean,” said Boltz.

And just as with the initial lawsuit, it’s important not to ignore the debt or simply refuse to repay it.

“If you don’t pay it, it will sit on your credit report for 10 years, and if they renew it, it counts as another lawsuit for another 10 years,” said Boltz. “You’re taking a beating on your credit report that in many ways is worse than a bankruptcy, because it shows that you have a judgment and you’re not dealing with it.”

Timely action is the key

Getting sued for debt can be nerve-rattling, but the good news is that you can often mount a valid defense as long as you understand the process and know how to respond.

Simply by filing timely and accurate responses, you greatly increase your chances of winning your case and avoiding repayment altogether.

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Matt Becker
Matt Becker |

Matt Becker is a writer at MagnifyMoney. You can email Matt here

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