Can I Settle a Debt After a Lawsuit Has Been Filed?

What Happens When Debt Goes Unpaid?

When a payment (such as a credit card payment) is 30 days past due, it’s officially considered late. At this point, your creditor (such as a credit card company) will attempt to collect this overdue balance. They may call you or send you a notice via mail or email. You can expect them to continue contacting you until you respond or the debt is paid.

Your Credit Score Will Take a Hit

Most creditors and lenders report late payments and accounts in default to the major three credit bureaus. These show up as negative marks on your credit report. Since payment history makes up a big portion of your credit score, you’ll likely see your credit score drop as a result of the delinquent account. 

Your Debt May Be Sold to a Third-Party Collection Agency

Some lenders/creditors will report your missed payment(s) at 30 days past due, while others may wait until you're 60 days past due.  Once you are more than 90 days past due on your payment, the original creditor may opt to charge off the debt and sell it to a third-party debt collection agency. Debt collectors are notorious for being persistent in their attempts to collect unpaid debt. 

If you ignore the debt collector or continue to default on your payment(s), the agency may choose to file a debt collection lawsuit against you. If the creditor has retained the debt, they also have the option to sue you. 

The Bottom Line Is…

Unpaid debt doesn’t just go away. It continues to be reported on your credit report, which harms your credit score and puts you at risk of being sued. 

How Do Debt Collection Lawsuits Work?

A debt collection lawsuit starts when the law firm that represents your creditor or debt buyer files a case against you in civil court. You will be served a court summons and a copy of the complaint. That’s the legal document that lists 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 at this point is ignore the lawsuit. This can result in your creditor getting a default judgment. Once your creditor has a default judgment, they can ask the court for an order for wage garnishment or a bank account levy. They may also be able to put a lien on property you own.

What Is a Wage Garnishment and Bank 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. Essentially, both orders give the creditor the opportunity to take your money from you. 

What You Need To Know About the Statute of Limitations in Debt Collection

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. It’s set by state law, so it varies from state to state as well as by the type of debt you have.

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. If a debt collector tries to file a lawsuit after the statute of limitations has run out, 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 and your creditor can’t sue you again for the same debt. While they can’t sue you or threaten legal action at this point, they can still attempt to collect payment in other legal ways. 

Note: You have to be the one to bring the statute of limitations defense to the court; the court won’t check the time period for you.

Even though you can’t be sued for the debt after the statute of limitations is up, it will remain on your credit report. Federal law requires collection accounts to stay on your credit report for up to seven years. The clock starts ticking on the date of your first missed payment. 

What Are My Options for Debt Relief if the Lawsuit Has Already Been Filed?

It’s important to remember that being sued isn’t the end of the road. You can still resolve a debt after a lawsuit has been filed. 

Lawsuits are costly to file and fight. This is why many creditors are motivated to find a resolution outside the court system. Your options for this include (but aren’t limited to) making a debt settlement agreement, paying the debt in full, or setting up a repayment plan. 

Here’s an important caveat though: If you’re in negotiations with the debt collector, it’s still important to respond to the lawsuit, file required paperwork, and attend any scheduled court dates or hearings in the meantime. This ensures you don’t miss your opportunity to raise defenses and that you aren’t subject to a default judgment if the debt collector isn’t acting in good faith.

Settle the Debt by Paying Less Than the Full Amount

You can try negotiating a debt settlement to resolve a  debt collection lawsuit outside of court. Many people do this successfully on their own, but you can hire a debt settlement attorney to help if you can afford it.

In some cases, the court will require that both parties in the 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 isn’t large. 

To settle the debt for less than the full amount you owe, you may need to offer one lump-sum payment. This can be tricky to do if you’re struggling financially. You can also offer a payment plan. Not all creditors will agree to a payment plan, though. 

What Are the Consequences of Debt Settlement?

Be aware of these things when considering debt settlement:

• The debt may show up on your credit report as “debt settled for less than the full amount owed.” This negative reporting will likely decrease your credit score. You may be able to negotiate how the debt is reported to credit bureaus as part of your debt settlement agreement.

• You may have to pay increased income tax. The IRS considers any forgiven debt (the amount you didn’t have to pay if you settled) to be taxable. 

Settle the Lawsuit by Paying the Debt in Full, Over Time With a Payment Plan

If you can’t make one lump-sum payment, you may be able to come up with a payment plan to repay the debt. Some creditors will only agree to this if you authorize an automatic deduction of the monthly payment from your bank account. They want to be certain you will repay the debt this time.

Why would a creditor agree to this? They want to avoid legal fees and/or the possibility of you discharging the full debt as part of a bankruptcy case.

File the Bankruptcy To Stop the Lawsuit and Discharge the Debt

Bankruptcy is a powerful debt relief tool. Filing bankruptcy can erase credit card debt, collection accounts, medical bills, judgments from debt collection lawsuits, and other types of unsecured debt. 

It can also stop debt collection lawsuits. As soon as you file for bankruptcy protection, the automatic stay goes into effect. This stops all collection activity against you including lawsuits for unpaid debts. 

The automatic stay also puts a stop to harassing creditor phone calls, wage garnishment, collection letters, repossessions, etc. As long as the underlying debt included in your bankruptcy filing is dischargeable, the lawsuit debt is dischargeable also.  

Upsolve's free web app can help you prepare your Chapter 7 bankruptcy forms without hiring a lawyer.

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 can last for many years. Some states also allow judgments to be renewed if they are not satisfied during the first term. Judgment creditors have significant collection powers and time to collect the full debt amount owed. 

If your debt feels overwhelming and you’re not sure where to start, consider credit counseling. A free consultation with a certified credit counselor can help you figure out the best debt relief option for your particular financial situation.

How Do I Know if I’m Judgment-Proof?

Certain types of income cannot be garnished or levied, and if you only have this type of income, you may be considered judgment-proof. This essentially means that you don’t own anything that creditors can legally collect from you, even if they filed a lawsuit and won. 

The following types of income are exempt from court-ordered garnishment: 

• Social Security benefits

• Supplemental Security Income benefits

• Public assistance

• Unemployment benefits

• Veteran’s benefits

• Child support payments

• Federal employee and civil service retirement benefits

Note: Just because you are judgment-proof now doesn’t mean that you always will be. If your situation changes and you no longer have an income that falls in one of the categories above, you may no longer be considered judgment-proof.