It can feel overwhelming to be sued by a creditor for a debt you have been unable to pay. However, while the threat of having a judgment entered against you and the related consequences of a lien, bank levy, or wage garnishment can be scary, a lawsuit for unpaid debts does not have to end with such severe consequences. Settling your debt is still an option, even after a lawsuit has been filed.
What does it mean to settle a debt?
A debt is considered settled when the creditor agrees to accept less than the amount owed in satisfaction of the debt. Once an account becomes delinquent, with a pattern of late or missed payments, some creditors are willing to negotiate a settlement and accept a percentage of the total balance to satisfy the debt. This gives creditors the benefit of receiving payment and eliminates the hounding collection calls and the threat of litigation to consumers who have been struggling to pay the debt.
Once the consumer has paid the agreed amount, the remaining balance is forgiven, and the consumer no longer owes the creditor money. The difference in the amount paid and the amount owed is considered taxable income according to the IRS, so the consumer will be responsible for paying any associated taxes. Though settling a debt can help relieve the financial burden on the consumer, accounts settled for less than the amount owed are reported as such to credit agencies and therefore, can negatively impact the consumer’s credit history and score.
Can I settle a debt after a lawsuit has been filed?
Unfortunately, ignoring debt does not make it disappear. If you have an unpaid account, the creditor can continue collection efforts, hire a collections agency or attorney for assistance with collections, or sell your debt to a debt buyer. Ultimately, whether your account is owned by the original creditor or a third-party debt buyer, the entity owed money wants to collect. If collection efforts are unsuccessful, the creditor can file a lawsuit to recover the money owed.
However, litigation is expensive. It is much more convenient and economic for creditors to collect the money they can rather than hiring an attorney, paying court fees, and other costs associated with recovering the money you owe. Therefore, even after a lawsuit has been initiated, meaning the creditor has filed a complaint in the court alleging you owe them money and you have subsequently received a summons and complaint providing you notice of the creditor’s claim, creditors will often still engage in settlement negotiations – though, the exact terms of the settlement, from the duration of payments to the total amount the creditor is willing to accept in satisfaction of the debt, may be much less favorable than what the creditor would have accepted before filing the lawsuit.
Though the creditor will have already spent money on an attorney to initiate the lawsuit, the creditor will save money by agreeing to a settlement now rather than allowing the matter to drag on through the costly phases of discovery, depositions, and trial. Often, creditors will rely on a Consent Judgment or similar document as collateral for the settlement amount.
In exchange for the creditor’s agreement to accept less money than is owed or extending the terms of repayment to something affordable to the consumer, the consumer agrees to sign a Consent Judgment. Every creditor handles debt settlement differently. Some creditors will agree not to file the Consent Judgment as long as the consumer satisfies the debt according to the settlement agreement, whereas other creditors will file the Consent Judgment and agree to file a Satisfaction of Judgment only after the settlement agreement has been satisfied.
How can I settle my debt?
You can settle your debt by simply asking the creditor if they will accept a lump-sum payment for less than the amount owed or maybe a few large payments totaling less than the total due, paid in a few months in satisfaction of the debt. Creditors are eager to collect payment, which is why so many creditors are willing to sell off delinquent accounts to debt-buyers for pennies on the dollar. The creditors would rather have something than nothing. Therefore, many creditors are surprisingly willing to accept a lump-sum payment of fifty percent or less in satisfaction of the delinquent account.
Once a lawsuit has been filed, negotiations will likely take place with the creditor’s attorney instead of the creditor directly and unfortunately, the settlement terms available are typically not as generous. While some creditors will still agree to accept a percentage of the actual balance due to satisfy the debt, sometimes settling the debt once litigation has begun simply means agreeing to pay the full balance over an extended period but stopping interest accrual from further increasing the balance during that repayment period.
Some creditors will only consider debt settlement if a lump sum payment is offered. Therefore, before engaging in negotiations with your creditor’s attorney, take inventory of your financial resources and consider whether it would make sense to borrow money from a family member, from your retirement, or if you have other means of coming up with a lump sum payment to satisfy the debt. If you cannot come up with a lump sum payment that is acceptable to the creditor, you can still negotiate a payment plan that will allow you to pay off the debt over time and avoid the consequences of a summary judgment.
The key to negotiating a settlement for your debt once a lawsuit has been filed is simply to ask. Come to the table knowing how much money you can afford to pay and ask if you can immediately tender payment as a showing of good faith and satisfy the debt without further litigation. However, keep in mind that settling your debt for less than you owe is not without consequence. While you may be able to escape a judgment and all the associated consequences when a creditor enforces a judgment, debt settlement will impact your credit and tax filings. The forgiven debt is reported negatively on your credit report which can decrease your score. Any amount of debt your creditor is willing to forgive is considered taxable income, which means you will be paying for that debt one way or another.
