A lot of people face debt problems at some point in their lives. If you’re facing debt-related challenges, you’re not alone and you do have options. Even if you’ve been sued because of an unpaid debt, you can still potentially resolve the matter, as you can manage this debt in a variety of ways.
Written by Attorney Jenni Klock Morel.
Updated November 29, 2021
Hearing the words “you’ve been served” is never good. It’s overwhelming to be served with a lawsuit, especially if you’re being sued for unpaid debts. A lot of people face debt problems at some point in their lives.
If you’re facing debt-related challenges, not only are you not alone, you have options -- even if you’ve been sued.
What Happens When Debt Goes Unpaid?
When you first miss making your monthly payments toward a debt, your creditor will attempt to collect this overdue balance, likely by calling you or sending you a notice via email or postal mail.
For example, as soon as you miss a credit card payment, the credit card company will begin calling the phone number on file. Once you are more than 90 days past due on your account, the original creditor can continue to attempt collection, can hire a debt collection agency or law firm to assist in collections, or can sell your debt off to a debt collector.
Chances are that after the months of missed payments stack up, the original creditor will cut its losses and sell the debt to a debt collection agency. Your account will read as “charged-off” on your credit report, which may decrease your credit score.
The debt collector who purchased your debt will then begin collection activity against you. If all collection activity fails and you continue to default, a debt collection lawsuit can be filed against you. Unpaid debt doesn’t just go away. It continues to be reported on your credit report, harming your credit score, and leaving you at risk of potentially being sued.
How Collection Lawsuits Work
A debt collection lawsuit commences when the law firm that represents your creditor files a case against you in civil court. You will be served a court summons and a copy of the complaint, which is the legal document that spells out the amount your creditor believes you owe and the reasons why they believe you are accountable for this debt.
The worst thing you can do after being served is to ignore the lawsuit. If you ignore the lawsuit, then your creditor can get what is called a default judgment. Once your creditor has a default judgment because you did not respond to the lawsuit, or a judgment because the lawsuit was successful, they can ask the court for a wage garnishment order or a bank account levy.
Wage garnishment gives your creditor the power to take money directly from your paycheck until the debt is paid in full. A bank levy gives your creditor the power to take money directly from your bank account.
What You Need To Know About the Statute of Limitations
There is a limit to the time period a creditor is allowed to file a debt collection lawsuit against you. This is known as the statute of limitations and it’s set by state law. The length of the statute of limitations varies by state and typically falls between 3–10 years from the date of the first defaulted payment or the date of the last payment received, depending on the state.
If a debt collector tries to file a lawsuit after the statute of limitations has run, then you can use the statute of limitations as a defense against the debt collection lawsuit. If the defense is successful, the case will be dismissed. If that happens, then your creditor can’t sue you again for the same debt. At that point, there is nothing they can do to collect payment from you other than to ask you to make good on the overdue balance.
But even though you can’t be sued for the bad debt, it will remain on your credit report. Federal law requires collection accounts to stay on your credit report for up to seven years. That length of time is calculated from the date of your first missed payment.
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What Are My Options?
When it comes to debt relief, you have options. You can still resolve a debt after a lawsuit has been filed. You can even resolve a debt after a creditor is successful in a lawsuit and obtains a judgment against you. As long as you face your debt problems head-on, you almost always have options that will allow you to seek significant debt relief or to restructure your debt so that paying it off becomes a more manageable process. Many creditors will let you resolve your debt at any time, whether by debt settlement, payment in full, or by another option for debt resolution, and even after they have filed a lawsuit.
Settle the Debt by Paying Less Than the Full Amount
Once a lawsuit is filed, it creates a new opportunity for you to negotiate a settlement because you’ll have a new person to negotiate with: the debt collection lawyer. Oftentimes, the court will require that both parties in a lawsuit try to reach a settlement agreement. And it isn’t uncommon for lawsuits to settle before going to trial, especially if the amount of money in dispute is not a huge sum. A debt collection lawsuit can potentially be resolved with debt settlement. You can do this on your own or hire a debt settlement attorney to help.
You can make a payment plan with the creditor to pay off the sum of the debt or partially pay the sum in a lump-sum settlement. That means you and your creditor agree that you’ll pay less than the full amount you owe, as long as you repay a significant fraction of the debt quickly. Payment plans are not always possible when it comes to debt settlement, as creditors have little incentive to risk another default. As a result, a significant lump sum payment might be required.
There are a few things to be aware of when considering debt settlement. A settled debt will report on your credit history as “debt settled for less than the full amount owed.” This negative reporting will likely decrease your credit score, making future borrowing more costly in the form of higher interest rates and annual fees on credit cards.
Also, be aware of potential tax consequences resulting from settled debts. The forgiven debt is considered income by the IRS. Increasing your income by the amount of the forgiven debt may create tax debts that you’ll be required to pay to the IRS later.
Settle the Lawsuit by Agreeing To Pay It in Full Over Time
You can always pay the debt in full with a lump sum payment. Of course, if you had that much money just laying around, you probably wouldn’t be in the situation you’re in. But, if you have the ability to make payments over time if your creditor is amenable to this solution. Since the creditor will be within striking distance of getting a judgment (and thereby a wage garnishment order) against you, the creditor may require access to your bank account so they can withdraw the payments directly.
This is a possible resolution even after a lawsuit has been filed but has not yet resulted in a judgment against you. Your creditor wants to resolve the suit so they can avoid racking up legal fees, court costs, and other legal costs when there is a risk that you could file for bankruptcy and they would potentially receive nothing.
Is Not Paying the Debt an Option?
In most cases, not paying the debt will not solve the challenges you’re facing. If you don’t pay what you owe and a lawsuit ends with your creditor getting a judgment or default judgment, then they will have more power to take collection action against you. A judgment creditor can levy bank accounts, get a wage garnishment, or put a lien on your property.
Also, keep in mind that judgments are good for many years, depending on the specifics laid out in your state’s laws. Some states also allow judgments to be renewed if they are not satisfied during the first term. Judgment creditors have significant collection powers and are given significant time to collect the full amount owed.
What if You’re Judgment Proof?
You’re judgment proof if you don’t own anything that creditors can legally collect from you even if they sued you and won. Essentially, being judgment proof means your creditors can’t harm you, even if they secure a judgment.
How does someone become judgment proof? Certain types of income cannot be garnished or levied. These types of income include Social Security benefits, supplemental security income benefits, public assistance, unemployment benefits, VA benefits, child support payments, and federal employee and civil service retirement benefits.
A person is considered judgment proof when all of their income is exempt from collection, they don’t have non-exempt cash in the bank, their assets are all exempt (worth less than what the law allows a person to keep or is an asset specifically protected by law), and they don’t have non-exempt equity in real estate. Be aware that just because you are judgment proof now doesn’t mean that you will always be judgment proof.
Filing Bankruptcy To Deal With Collection Lawsuits
Bankruptcy has the power to erase credit card debt, collection accounts, medical bills, judgments from debt collection lawsuits, and other types of unsecured debt.
Bankruptcy stops collection lawsuits. As soon as you file for bankruptcy protection, the automatic stay goes into effect, which stops all collection activity against you. The automatic stay puts an immediate end to lawsuits for unpaid debts, harassing creditor phone calls, any active wage garnishment or wage garnishment about to start, collection letters, repossessions, and any other collection efforts taken by debt collectors or creditors.
Generally, the automatic stay remains in place for the life of the bankruptcy case. Once a bankruptcy case results in a discharge of debts, the stay is no longer necessary, since creditors of discharged debts can’t legally attempt to collect on those debts ever again. Between the automatic stay and bankruptcy discharge, a collection lawsuit can be stopped and can’t come back to life again later.
At the conclusion of a successful Chapter 7 or Chapter 13 bankruptcy, the bankruptcy court will grant a discharge order. Your bankruptcy discharge relieves you of your obligation to pay back the eligible, unsecured debts that were included in your bankruptcy. All debts you owe at the time of filing must be listed in your bankruptcy but which debts will get discharged depends on the type of debt and a few other factors. You will never have to pay back collection accounts from before you filed bankruptcy if they are ultimately classified as discharged debts.
Filing for bankruptcy is a powerful debt relief tool. If you have debt problems it may be time to consider how filing would affect you, as bankruptcy is not the right solution for everyone. A good starting point is to complete credit counseling (it’s free!) by talking to a free counselor at an accredited financial counseling nonprofit. And it isn’t a bad idea to meet with a bankruptcy attorney for a free consultation to explore whether bankruptcy is a debt relief solution that might be right for you. Pursuing both credit counseling and a free bankruptcy consultation will give you the most comprehensive overview of your options, as well as personalized recommendations for your unique financial situation.
You have options on how to get a handle on your debt problems. Debts can be resolved in a number of ways, even after you have been served with a lawsuit. Debt settlement is an option worth exploring, regardless of where a debt is in the collection cycle. There’s also the option to pay the debt in full by setting up a payment plan with your creditor. Filing for bankruptcy may also be an option for you and will put an end to any pending collection lawsuits and prevent the filing of future lawsuits for debts you owed before bankruptcy.
Upsolve's free web app enables filers to prepare their Chapter 7 bankruptcy forms. If you don’t qualify for Chapter 7, you can typically locate a bankruptcy attorney in your area who provides free bankruptcy consultations so that you can learn more about your debt relief options.