Can I Still Settle My Debt if I’m Sued By A Creditor?

Guest Post by Jeremiah Heck 

The short answer: yes, you can still settle your debt even if a creditor sues you. 

The longer answer: the settlement is often less than the amount owed, and in some circumstances, you might have grounds to sue the creditor (or take other legal action). 

Read on to learn about your consumer rights in a debt collection lawsuit, debt settlement, and potential legal defenses when you find yourself facing unpaid debts. 

Before You Settle, Verify

According to Forbes, 70 million American consumers have credit issues ranging from collection agencies to lawsuits. Debt settlement — negotiating with creditors to settle for an amount less than you owe — is an effective way to avoid litigation. 

Before you pay anything, however, verify that the debt is accurate. Don’t assume that the credit card company, collections agency, or law firm has a valid complaint. Creditors and collections agencies have been known to sue the wrong person for a default payment.

Get It in Writing

The Fair Debt Collection Practices Act (FDCPA) gives you the right to ask a company to verify a debt. Mail a certified letter (return receipt requested) asking for verification in writing. Mailing it in this manner ensures that the creditor (or the company suing you) received your letter. It might protect you from additional late fees or interest.

Did Someone Steal Your Identity?

If you’re the victim of identity theft and have fraud prevention through your bank, credit union, credit card company, or a third party, you might not have to pay anything. If you don’t have these protections, you could negotiate with the creditor. Even though you end up paying for something you didn’t purchase, the creditor can clear your name — your real identity — so your credit score doesn’t suffer.

Negotiate a Settlement

Credit card companies prefer to settle rather than litigate, depending on the amount owed. Even a partial repayment is better than nothing. They want to avoid costly attorney fees and the time it takes to chase an unpaid debt could be used on more productive activities. 

You have the right to negotiate a settlement with the creditor, even when they’ve filed a suit against you.

Negotiating Tips from Uncle Sam

The Consumer Financial Protection Bureau (CFPB) offers these suggestions when negotiating a debt settlement:

1. Write down a summary of your monthly expenses, including the amount you want to repay and your take-home pay.
2. Set aside a small amount for unexpected expenses (like a flat tire) or emergencies (such as an injury).
3. Explain your plan to the collection agency, creditor, or law firm that’s suing you.
4. Ask if you can record the conversation to avoid any miscommunication or misunderstandings.
5. Ask the creditor to waive late payments that add hundreds of dollars to your debt.
6. Ask about removing additional interest on the remaining balance.
7. Don’t pay more than you can afford.
8. Don’t sign any agreement until you fully understand the terms and conditions.
9. You have the right to bring an attorney with you to negotiate on your behalf.

How Much Will You Have to Pay?

By the time your financial struggles reach the point of being sued by a creditor, it’s clear that you probably cannot repay your debt in full. How much you will have to pay depends on the creditor, the amount, and the age of the debt.

In general, debt settlements are 25 to 50 percent of the original amount. However, this amount could change if you don’t abide by the repayment schedule.

Defend Yourself

Some consumers successfully resolve a credit dispute through the judicial system. One of the more common defenses is challenging the creditor’s right to sue. It’s common practice for the primary creditor to sell debt. You have the right to determine if the plaintiff has the right to sue you.

To challenge the creditor’s right to sue, ask for the following:

1. A credit agreement signed by you
2. Documentation of the debt’s chain of custody beginning with the original creditor

Check the Statute of Limitations

Each state has its own statutes of limitations, or deadlines, on how long creditors have to bring a lawsuit against debtors. This deadline usually starts on the last day you were active on an account.

If you prove that the creditor filed a lawsuit after the statute of limitations expired, the court will likely dismiss the case.

File for Bankruptcy

Filing for bankruptcy is usually the last option when you’re facing a creditor’s lawsuit. However, a petition for bankruptcy with the court stops all debt collection activity.

Bankruptcy can wipe your debts away, but it also makes it challenging to borrow money in the future while your credit score recovers.

It is in your best interest to explore other options before filing for bankruptcy, such as debt settlement or even debt consolidation.

Can You Sue the Creditor?

Creditors have the right to take legal action for a valid debt. You have the right to pursue legal action under the Federal Debt Collection Practices Act (FDCPA). When a creditor or their authorized representative uses unethical or unlawful collection methods, you might have grounds for legal action for FDCPA violations.

Debt Collection Actions with Legal Consequences for the Creditor

According to the FDCPA, creditors may not:

1. Call you at your job or home during inappropriate hours (usually, between 9:00 p.m. to 8:00 a.m.).
2. Make repeated phone calls (for example, calling you three times in a day).
3. Call after being informed that you cannot pay your debt, or an attorney is representing you.
4. Use verbal or physical threats to force you into paying.
5. Make your delinquent debt public (or threaten to).
6. Impersonate an attorney or imply that they are an attorney.
7. Threaten you with arrest or imprisonment.
8. Deposit or threaten to deposit a postdated check before the written date.

Closing Thoughts

You can settle your debt when a creditor sues you or takes one of the other actions outlined above. However, the one thing you absolutely should never do is ignore a legal summons or complaint.

If you fail to respond to the lawsuit, the creditor will probably get a default judgment against you. You might have to pay for the creditor's legal fees, court costs, and interest on the balance due. Worse, the creditor might be allowed to garnish your wages or intercept a tax refund.

Remember, there’s no shame in falling behind on loans or credit cards. You have several options to climb out of a financial hole, including working with a bankruptcy and debt relief law firm. 

Award-winning attorney Jeremiah Heck focuses primarily on consumer law and legal representation in real estate, employment, and personal injury. His firm, Luftman, Heck & Associates, defends individuals in many types of consumer protection cases, including debt settlement and bankruptcy. He offers a legal perspective on consumer protection issues for SmartMoney.com, a prominent online financial website.