Can You Settle a Debt After Being Sued? Your Options Explained

You can settle a debt after being sued. Many creditors prefer settlement over court battles. Ignoring the lawsuit makes everything worse. You still have options to resolve the debt.

Facing a debt lawsuit feels scary. You’re not alone, and you can fight back.

Your Options After Being Served With a Lawsuit

Being sued doesn’t mean the case is over. You can still resolve your debt outside court.

Lawsuits cost money and time to pursue. Creditors often prefer settlements to long court battles. You can negotiate a settlement, pay in full, or arrange payments.

Here’s what matters most: Keep responding to the lawsuit while you negotiate. File all required paperwork on time. Show up to every court date and hearing. Missing these deadlines can result in a default judgment against you.

Many people can’t afford legal representation for debt lawsuits. Our partner Solo helps you draft responses and negotiate settlements with collectors.

Settle for Less Than You Owe

You can try negotiating a debt settlement. Many people succeed without hiring attorneys. Debt settlement attorneys can help if you can afford one.

Courts often require both parties to attempt settlement first. Most lawsuits settle before trial, especially for smaller amounts.

Settling for less usually requires a lump sum payment. Payment plans are harder when you’re struggling financially. Not all creditors accept payment arrangements.

Consequences of Debt Settlement

Consider these factors before settling:

• Your credit report may show “settled for less than owed.” This negative mark hurts your credit score. Negotiate credit reporting terms in your settlement agreement.
• You may owe income tax on forgiven debt. The IRS treats forgiven amounts as taxable income.

Set Up a Payment Plan

Can’t make a lump sum payment? Try negotiating a payment plan instead. Some creditors require automatic bank withdrawals for payment plans. They want guaranteed repayment this time.

Why do creditors agree to payment plans? They want to avoid legal fees. They also fear you might discharge everything in bankruptcy.

File Bankruptcy to Stop the Lawsuit

Bankruptcy is powerful debt relief. Filing erases credit card debt, medical bills, collection accounts, and lawsuit judgments.

Bankruptcy stops debt collection lawsuits immediately. The automatic stay begins when you file. All collection activity must stop, including active lawsuits.

The automatic stay also stops harassing phone calls, wage garnishment, collection letters, and repossessions. Any dischargeable debt included in bankruptcy eliminates the lawsuit too.

If bankruptcy sounds right for your situation, speak with a bankruptcy attorney for free to explore Chapter 7 or Chapter 13 options.

What Happens If You Don’t Pay?

Not paying rarely solves your problem. Creditors who win judgments gain powerful collection tools. They can levy your bank accounts. They can garnish your wages. They can put liens on your property.

Judgments last for many years. Some states allow judgment renewal if not satisfied initially. Judgment creditors have significant power and plenty of time to collect.

Feeling overwhelmed by your debt? Consider credit counseling. A free consultation with a certified counselor helps you find the best solution.

Are You Judgment-Proof?

Certain income types can’t be garnished or levied. If you only receive protected income, you may be judgment-proof. Creditors can’t legally collect from you, even with a judgment.

These income types are exempt from 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

Being judgment-proof isn’t permanent. Your situation can change. If you start earning non-exempt income, you may lose judgment-proof status.

The Debt Collection Timeline

Payments become officially late at 30 days past due. Your creditor starts collection attempts immediately. They call you and send notices by mail or email. Contact continues until you respond or pay the debt.

Your Credit Score Drops

Most creditors report late payments to the three major credit bureaus. These appear as negative marks on your credit report. Payment history heavily impacts your credit score. Expect your score to drop with delinquent accounts.

Debt Gets Sold to Collection Agencies

Some lenders report missed payments at 30 days past due. Others wait until 60 days. Once you’re 90+ days past due, creditors may charge off the debt. They sell it to third-party collection agencies.

Debt collectors are famously persistent. If you ignore collectors or keep missing payments, they may sue you. Original creditors who keep the debt can also file lawsuits.

Unpaid Debt Doesn’t Disappear

Unpaid debt continues harming your credit report. Your credit score suffers. You risk being sued. Debt doesn’t vanish with time.

How Debt Collection Lawsuits Work

Debt lawsuits begin when the creditor’s law firm files against you in civil court. You receive a court summons and complaint copy. The complaint lists the amount owed and reasons for your liability.

Never ignore the lawsuit. Ignoring results in default judgments. Default judgments give creditors power to garnish wages or levy bank accounts. They can also put liens on your property.

Our partner Solo helps you respond to lawsuits and negotiate settlements before judgments occur.

Wage Garnishment and Bank Levies Explained

Wage garnishment takes money directly from your paycheck. Bank levies take money directly from your bank account. Both orders let creditors seize your money until the debt is satisfied.

Understanding the Statute of Limitations

Creditors have limited time to sue you for debt. This time limit is the statute of limitations. State law sets these limits. They vary by state and debt type.

Most statutes of limitations run 3-10 years from your first missed payment. Creditors who sue after this period can be defeated in court. You must raise the statute of limitations as a defense. Courts won’t check automatically.

Successful statute of limitations defenses dismiss the case permanently. Creditors can’t sue again for the same debt. They can still attempt other legal collection methods.

The debt remains on your credit report even after the statute expires. Federal law keeps collection accounts on credit reports for seven years. The clock starts at your first missed payment.