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The term debt litigation can refer to a couple of different kinds of legal actions. In some cases, debt litigation is a type of lawsuit filed by a creditor in order to recover delinquent payments from a debtor. For example, a bank may file a suit in order to recover credit card debt owed by a borrower. Bankruptcy litigation is another type of debt lawsuit, and it is usually filed for the purpose of allowing a debtor to repay or void outstanding debts under a bankruptcy court’s protection. Debt lawsuits are considered a form of civil litigation in most countries.
In a debt litigation action to recover delinquent funds, a financial institution, collection company, or other creditor is usually owed a significant amount of money by a debtor. The creditor typically serves the debtor with paperwork called a complaint and summons. The complaint details what type of relief the creditor is seeking, and the summons requires the debtor to appear in court at a certain time. In response to the complaint, the debtor may provide a written answer. In most countries, it is common, though not required, for a lawyer specializing in debt laws to represent each party.
Before the lawsuit is heard in court, the creditor and the debtor may choose to negotiate an out of court settlement. It is often in the best interest of both parties to avoid going to court in order to save on lawyer fees, court costs, and time. As part of the settlement process, a creditor may agree to provide a flexible installment payment option or forgive a portion of the debt.
A bankruptcy case is customarily initiated by a person who cannot pay his or her outstanding personal debts. A business owner may also file a bankruptcy action on behalf of his or her business. If this occurs, the business usually either shuts down or keeps operating while making reduced payments to its creditors under the supervision of a bankruptcy judge. In rare cases, a creditor may mandate that a debtor file a bankruptcy action. This is known as involuntary bankruptcy debt litigation.
Sometimes the bankruptcy lawyer representing the debtor will work with the court and any creditors to set up a reasonable repayment schedule. In other situations, the debt litigation may result in the debtor declaring a legal bankruptcy. Different types of legal bankruptcy can be filed in different countries, depending on who the debtor is and what the desired outcome is. In some cases, nearly all debts will be voided, although the debtor will have a difficult time securing credit in the future.