In California (and most states) a defendant has a specified period of time to file an answer or other appearance in Court after being served by a plaintiff and failure to respond within that time period allows the plaintiff to enter a default and eventually obtain a judgment predicated on default. See our article on Default Hearings: Not Always a Slam Dunk.
It is vital to understand that a default judgment, once entered, is the same as any other judgment, with all the ability to attach assets and garnish wages as any other judgment.
Depending on the State, the plaintiff may have to apply for a hearing to prove damages. In arbitration proceedings, the plaintiff has to prove both liability and damages but in court default hearings in California, liability is presumed due to the entry of the default and the plaintiff only need prove damages.
In some jurisdictions and with some types of cases the plaintiff can enter judgment based on papers and declarations filed with the Court and need not appear in Court to present testimony. Some types of courts and cases require a full hearing with testimony, though there is no defendant there to cross examine. But in all cases, once the judgment is entered, the creditor has the full battery of collection remedies available as if the creditor had gone to trial and won before a judge or jury.
Why do defendants allow such judgments to occur without contesting?
Some defendants do not bother to read the legal papers served upon them which later allow entry of default. Some defendants are victims of false service reports (called “sewer service” since the process server, instead of serving the defendant, merely threw the papers away and filed a false declaration of service.) Some defendants simply procrastinate or cannot find an attorney to represent them in time to appear before default is entered. If served, you have to move quickly. Some think that they need not bother responding since they plan to eventually file bankruptcy or may have no assets to protect.
But regardless of the cause, failure to appear allows a creditor to use the tools of collection and the judgment, increasing at the rate of ten percent a year in California, can remain in place for decades.
This article discusses what remedies may be available to a party facing a default judgment.
The Options Available.
SET ASIDE DEFAULT: A defendant can petition the Court to set aside the default. This is a noticed motion before the Court seeking to ask the Court to remove the default and allow the defendant to answer the pleading as if no default was ever taken. Plaintiff will appear to contest that motion usually.
The defendant has the burden of proving the default should be removed and the usual grounds are plaintiff’s alleged failure to achieve legally required service on defendant; excusable neglect (the attorney was ill, etc.); or some equitable argument that justice can only be served by allowing an appearance.
Most Courts, including California, put strict time limits on when that motion may be filed (six months from entry of default in California though this time limit may be altered based on various factors) and the longer the period of time from entry of default, the harder it is to have the Court remove it. Unless there was proven fraud in the service, most Courts will not remove the default entered years before.
The longer you wait to file your petition, the less chance you will have to prevail.
Most states follow the Federal Rules of Civil Procedure in general form and Rule 60 lays out the criteria the Federal Court will use to determine if default should be removed:
Rule 60 provides six reasons that a court can set aside a default judgment:
(1) Mistake, inadvertence, surprise, or excusable neglect;
(2) Newly discovered evidence which by due diligence could not have been discovered in the prior proceeding;
(3) Fraud;
(4) The judgment is void;
(5) The judgment has been satisfied, released, or discharged;
(6) Any other reason justifying release from the judgment.
The Court has wide discretion in this area of inquiry.
SETTLE or PAY: Once the judgment is entered, the bargaining position of the plaintiff is extremely strong. They are earning ten percent annually on the judgment, can attach assets, wages, even force sale of the real estate owned by the judgment debtor. Nevertheless, a cash settlement offer for a portion of the judgment may be seriously considered since the process to enforce can take many months and quick cash is often tempting to the plaintiff. Further, a defendant can advise that the rejection of the motion to remove the default will be appealed and that can cause further delay and expense to the plaintiff.
BANKRUPTCY: As described in our article on Bankruptcy, that relief is often available to the judgment debtor though the process requires the debtor to give up all assets above a certain amount. At times, the mere credible threat of bankruptcy being filed will cause a judgment debtor to seriously consider reducing the demand for a settled amount.
Transfer to Defraud Creditors
One method often attempted by debtors is not recommended and that is transfers of assets to third parties, hoping that the judgment creditor will determine that the debtor has no assets and is not worth pursuing. This actually creates a cause of action against the transferee which allows the creditor to now sue that person or persons to retrieve the asset and can cost the transferee a good deal of money.
If the transfer was not done simply to avoid payment and has a good business purpose or was achieved before the judgment, defenses to the new suit can be advanced. See our article on Transfers to Defraud Creditors.
Conclusion:
The lesson is clear. If served with a summons and complaint, move quickly to retain counsel and make your appearance within the time limit set in the papers. And if by chance default has already been taken, you should quickly seek legal advice to determine if it can be removed. Days count and the longer you put off protecting yourself, the less chance you will have to counter the default effectively.