A summons lands on your desk, and the debt you had been juggling suddenly has a court case attached to it. Can you still settle? Yes. Even after the suit is filed, you still have the opportunity to negotiate and settle your debt in an out-of-court settlement. In other words, you’re not out of luck.
In a perfect world, that means a cash settlement. A lump sum that puts a bow on a case. On the one hand, the creditor loses some money. On the other, the debtor saves themselves from a wage garnishment or bank levy, and the hassle of having to continue to defend the case.
But what if you don’t have a lump sum? Plenty of business owners don’t, especially by the time a lawsuit arrives. In that case a compromise by way of structured payments is the next best thing. Affordable payment arrangements can keep you from being garnished or having your bank account levied.
When the Creditor Sues
One factor that influences how much you can settle for is whether the plaintiff is the original creditor or a debt buyer. The court papers you were served will show who the attorney is working for.
If it is the original bank, know that lawsuits at this stage, before the account has ever gone to a debt collector, are not that common, but they do happen. Banks generally don’t sue for late payments until after the account has been more than six months past due. The longer a debt sits there, the more risk it holds, and the more likely it will be sued. Certain accounts are more likely than others to be sued: If you have a new card, maxed it out, and then stopped paying; if most of the balance has been moved to the card via a balance transfer; if there are a lot of recent purchases; if you are continuing to pay other card bills. The bank may select those accounts with computer software or on a manual basis by someone looking through old files. It also depends on the creditor’s “collection trends and policies.”
None of that helps much once you have been served, but it does tell you who you are dealing with. When the creditor sues, you have two main options. You can offer a lump sum to settle the account, or you can offer to pay the account through monthly installments that you can afford. Getting some of the balance knocked down while also paying over time is possible, but not common, once you have been sued.
Debt Buyers
A suit brought on behalf of a debt buyer is a different negotiation. Debt buyers purchase defaulted credit card accounts in bulk from issuers and try to collect the money. It’s an investment and a gamble, as they don’t get people to pay on the majority of the accounts, not by a long shot; they just need enough from the whole portfolio to cover their purchase price, overhead, and profit. So they settle for less than what’s owed. Accounts that have been in default from six to twelve months cost the most to a debt buyer. As the account gets older, the price gets lower and lower, and charged-off accounts are often bought and sold several times over and the price gets cheaper each time.
Some debt buyers use in-house collectors, some use a subsidiary agency, some contract with another collection agency, some contract with collection law firms they have relationships with. The type of debt on the account – whether the balance reflects one big purchase or numerous small ones, or whether it originated from a balance transfer – doesn’t matter to debt buyers, who focus only on accounts they think the customer is likely to pay if sent to court. Collectors and attorneys hired by debt buyers generally work on a contingency basis: they get paid only if you pay the debt, meaning they’re shopping for the best fish in the pond: software does that, scanning your credit report and whether you’re current on your mortgage payment, judging how wealthy your zip code is and whether they have an attorney in your state.
Another factor in how much you can settle for is verifiable hardship. If you have been unemployed, are dealing with medical problems, live on a low income, and/or have another debt being garnished, that will impact how much you can offer to settle for.
Defending the Lawsuit
With a debt buyer, though, settling is not your only option. You may want to think about defending the lawsuit instead, because debt buyers receive little information about your account. Depending on the situation, they may receive only a spreadsheet listing your name, account number, social security number, balance as of the date of sale, address, phone number, and employer. They may have a difficult time proving their claim in court. If the debt is resold, the information may be even less.
They are counting on you not to push back, because most people never even enter an answer to a lawsuit. They’re ashamed to do it, they’re terrified of going to court, or they don’t realize they have another option. As a result, when they don’t file an answer, a default judgment gets entered against them and the court basically assumes that the debt and balance are valid because nobody has challenged them.
Debt buyers and their lawyers have also been called out for robo-signed affidavits, much like the mess in foreclosures. Debt buyers often do not have the data necessary to support their claims, and may not be willing to pay for the witness necessary to testify to the validity of their claims. Filing an effective answer can result in a better settlement or in dismissal.
Some consumer attorneys have had real success defending these suits by challenging what the debt buyer claims. The problem with hiring an attorney is that it costs money, and you have to weigh that against what it would cost to settle. As a practical matter, if the amount is less than $2,500, it may not make economic sense to hire an attorney. Many attorneys just tell clients “pay the bill” — but what you need is an attorney who knows how these cases are litigated, and there aren’t that many of them.
If you’ve been sued, and have several debts that you’re just not able to pay, and you’re stuck, it may be worth looking at bankruptcy and chapter 7 could allow you to just have a fresh start.
So, back to the question you came here with. Can you settle with a creditor after being sued? You bet you can. Start here: go back to the service papers and find out who the plaintiff is. With the original creditor, that usually means a lump sum or monthly payments you can afford. With a debt buyer, you can settle for less than what’s owed, and if you’re in a situation where that won’t work, you can defend the case and have an opportunity to have the case dismissed.
