If you've been served with a notice to appear in court by any old creditor, chances are good that you've had plenty of other warnings about past-due debts and may be approaching insolvency. Credit card companies sue delinquent customers only after exhausting all other attempts to collect on their debts.
Fortunately, many creditors are hesitant to commit the time and resources necessary to mount a lawsuit. While they may be willing to appear in court, most use the threat of legal action as a scare tactic to encourage their customers to resume sending payments.
In theory, you can neuter your creditor's lawsuit by declaring bankruptcy. If you ignore your court summons without declaring bankruptcy, your wages will eventually be garnished by court order and you'll lose a significant amount of your take-home pay to your creditor. In some states, garnishments can amount to 25 percent or more of each paycheck. This activity will continue until your debt has been paid in full or your creditor stops the process.
Even if you intend to file for bankruptcy, you should appear in court to face your creditor. In fact, you may be able to use the threat of bankruptcy as a negotiating tactic. If you can convince the presiding judge that a ruling in favor of your creditor would cause a serious financial hardship that might render you insolvent, he or she may issue a judgment for a lesser amount or broker a payment plan that spreads your financial pain over a period of months or years.
Bankruptcy won't automatically absolve you of responsibility for the debt in question. If you file for Chapter 7 bankruptcy, most of your unsecured debts will be wiped out. Since both past-due credit card bills and court judgments are generally considered unsecured, you likely won't owe anything further on this debt. However, you'll also lose most of your assets to your creditors, including any savings reserves and non-exempt investment vehicles. In other words, you'll still end up contributing some property or funds to the creditor who issued the summons.
In certain circumstances, you may be required to file for Chapter 13 bankruptcy. The likelihood of this increases in proportion to your income: If you have a stable job that pays well, your petition for Chapter 7 bankruptcy will probably be denied. In this case, your presiding judge will broker a post-bankruptcy repayment plan with your creditor.