How to Settle Credit Card Debt When Lawsuit Has Been Filed

It’s normal to ignore collection calls and other messages from creditors. Until they sue you. Yikes – is it too late to settle credit card debt when a lawsuit has been filed?

Not necessarily. You might still be able to settle credit card debt after a lawsuit has been filed, but you should move quickly.

Understanding Debt Lawsuits

Being sued for credit card debt is stressful. But, understanding the process could make it easier to handle. Here’s a simple road map to help you know what to expect..

The Summons and Complaint

When a lawsuit is filed, you’ll receive two important documents: the summons and the complaint. The summons includes administrative details about the lawsuit—who is suing you and in what court. The complaint spells out the legal claims of the person or business suing you. The party suing you is called the plaintiff. In the case of credit card debt, the plaintiff would be a creditor who feels they are owed payment from you. 

The complaint should detail the amount owed and the reasons for the lawsuit. Examples may include overdue payments, incomplete repayment, or your refusal to respond to requests for payments. The complaint should also specify what remedy (solution) the plaintiff is seeking. 

When you receive a summons or complaint, don’t panic. You should plan your response carefully, but be sure to meet any deadlines in the documents. If you don’t, your creditor could win a default judgment. That means an automatic loss for you.

The Legal Process

The legal process involves these steps:

1. Filing an Answer: You need to file an answer to the complaint, explaining your side of the story.

2. Discovery: This stage involves both parties exchanging information about the debt.

3. Trial: The lawsuit may go to trial in some cases. But there are often chances to settle first.

Through this process, you might find chances to negotiate a settlement. Or, you might dispute the validity of the debt.

Possible Outcomes

If the court sides with the creditor, you might be ordered to pay the creditor. The amount may include interest and penalties on top of the amount you originally borrowed. The creditor might be allowed to garnish your wages (force your employer to send part of your paycheck to the court and apply it to your debt). The creditor may also be permitted to levy your bank accounts (take money) or place liens on your property. A lien means that if you sell the property, the creditor gets paid back before you get money from the sale. 

However, if you present a strong defense, the court may dismiss the case or reduce the amount you owe.

Depending on how strong you feel your case is, you can decide whether to fight the lawsuit in court or try to reach a settlement before trial.

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Avoid negative consequences of a lawsuit

If you receive a summons to court, the worst thing you can do is ignore it. If you don’t respond or show up, the judge will almost certainly issue a default judgment against you. Once that happens, the debt collector (now called the “judgment creditor”) can file for a Writ of Execution.

A Writ of Execution entitles the default creditor to garnish your wages or attach assets like bank accounts or other property. Once that happens, creditors are less likely to accept a lower amount because there are many legal ways for them to collect the entire balance from you, plus court fees and other collection costs. 

What happens if you ignore a lawsuit?

If you ignore a lawsuit, the plaintiff will almost certainly win the right to collect money from you – the balance you owe plus interest and collection costs – perhaps even attorney fees and court filing expenses. And as long as you have non-exempt income or assets, you are fair game for wage garnishment or asset attachment. 

Non-exempt income and assets are those that your state allows judgment creditors to take – for instance, 25% of your disposable income. 

Exempt income or assets cannot be taken – like social security or disability income and bank accounts holding those funds. 

Think you’re “judgment proof” (too broke for your creditors to collect) because you don’t earn a lot or have money in the bank? Think again. Judgments can last for years and successful plaintiffs can renew them when they lapse. Once you earn more or come into some money, the judgment creditors will be waiting. And over time, interest accrues and the balance grows.

How much can they garnish or take from you for credit card debt? Up to 25% of your disposable earnings if your monthly income exceeds $1,256. And they may be able to deplete your bank accounts as well. 

Even if you receive notice of a default judgment against you, you may be able to settle – if you respond soon enough.

Five steps to take if you are sued for credit card debt

First, no one can legally sue you without properly serving you. That means they must deliver a summons informing you that you’re being sued, the name of the plaintiff, the amount it says you owe and your court date and time. 

Taking action instead of hiding from the problem will make you feel better and ultimately help you move on. 

Here are five steps you should take after receiving a summons. 

1. Stay calm when you receive a summons

Don’t freak out if you get a summons. It doesn’t mean you’re a bad person or that anyone’s looking to humiliate you in court. A lawsuit often means your creditor or debt collector has been unable to communicate with you about your debt. Lawsuits may be their only option once you ask them to stop contacting you. 

Your job at this point is to stay calm. Next, determine who is suing you.

2. Read your summons: who are you up against?

Your summons must state who is suing you and provide contact information for the creditor or its attorney. It’s important to determine if you’re being sued by your original creditor – the credit card issuer – or a debt collector. Your chances of settling and the amount you’re likely to save by settling vary depending on who is suing you – an original creditor vs  a debt buyer.

Banks, credit card companies and other creditors may write off old accounts and package them into portfolios, which they sell to debt buyers for pennies on the dollar. It is not uncommon for a debt buyer to pay less than five cents per dollar owed – meaning it could accept ten cents on the dollar from you and still double its investment. 

Knowing who you’re dealing with can give you an idea of what they might be willing to accept to settle the debt and stop the lawsuit.

3. Validate the debt – do you owe the money?

Just because someone sues you doesn’t mean you owe them money. Do you recognize the debt? If not, send a written debt validation letter right away. The Consumer Financial Protection Bureau (CFPB) has debt verification letter templates you can use. 

Ask who the original creditor is and request a copy of the last billing statement from the original creditor, the amount owed when the collector purchased the debt, the date of last payment and whether the debt is past the statute of limitations. Send this letter by certified mail and request a return receipt.

Until it validates the debt, the collector must cease collection attempts. 

4. Answer your summons

How do you answer a summons to court for credit card debt? First, calculate your deadline date to respond. Read your summons and any accompanying paperwork carefully. 

Filing an answer prevents the debt collector from obtaining a default judgment against you. You’ll respond to the complaint’s claims and put the collector on notice that you plan to fight the suit. 

According to the CFPB, 75% of consumers sued for debt don’t appear in court, and the creditor who sues receives a default judgment in their favor. You may be in a stronger position to settle once the collector understands that you’re not going to just hand over the win.

Your formal answer is your only chance to put forth an “affirmative” defense – you can't bring them up later. Here are some common affirmative defenses:

• The statute of limitations has lapsed.

• The credit card debt is not yours.

• You already paid the credit card debt.

• The credit card was canceled.

• You were a co-signer but were not informed of your rights as a co-signer.

• You were improperly served.

• The plaintiff has not validated the debt.

• The plaintiff violated the Fair Debt Collection Practices Act.

Alternatively, you may choose to file a motion to dismiss for the same reasons. Note that simply being unable to pay the debt is not a legal defense.

5. Plan for repayment

Assuming that you don’t expect to win at trial, you’ll need to figure out how to work things out with your credit card company or debt collector. 

Figure out how much you can devote to paying your debt before contacting your creditor. And decide what you want – more time to pay? A smaller payment? An affordable repayment plan? Waiving interest and penalties? A reduced balance?

You’ll also want to evaluate the strength of your position. If you have good credit, earn a decent living or have some savings, creditors have little reason to negotiate with you once they win in court. They can simply use the collection tools at hand and garnish your wages or attach your bank account. And eventually, they’ll probably receive the full amount you owe plus collection costs and attorney’s fees. 

The weaker your position, the more important it is to settle fast and before you get to court. File your answer on time. If you already have a default judgment, appeal it. Negotiate realistically, knowing the alternative could be 25% of your paycheck going to your creditor until your debt has been cleared. 

On the other hand, if you owe a lot, have bad credit and earn very little, you hold the cards. Take a shot at a DIY debt negotiation. Try to convince the creditor that you’re five minutes from filing bankruptcy and see how little they’re willing to accept. 

Legal Defenses Against Debt Lawsuits

Knowing your legal defenses could improve your chances in a debt lawsuit. Here are some common defenses that might apply to your situation:

Statute of Limitations

Every state has a statute of limitations for collecting debt. That’s a time limit for creditors to file a lawsuit against you. If this time limit has expired, you could use it as a defense to have the lawsuit dismissed. Check to see how your state applies the statute of limitations. If you believe that statue has expired, gather evidence to support your claim.

Improper Service of Process

Creditors must follow specific procedures when serving you with a lawsuit. If they fail to do so correctly, you could challenge the lawsuit on the grounds of improper service. This might involve proving that the summons, complaint, or other documents weren't delivered as the law requires. If you’re successful, this defense probably won’t clear the case against you. But it could buy you more time.

Lack of Standing

Debt is often sold from one creditor to another. In order to sue you, the creditor must prove that they currently own the debt and have the right to collect it. If they can't prove this, you could argue that they lack standing to sue you.

Debt Validation

You have the right to ask for proof of the debt. This makes the creditor give evidence that the debt is real and that you owe the specified amount. This may include providing account statements, signed agreements, and records of payments made. If they can't provide sufficient evidence, you could use this as a defense.

Errors and Fraud

Check the details of the debt for any errors or signs of fraud. This might include incorrect amounts, improperly signed agreements, unauthorized charges, or identity theft. If you find discrepancies, gather evidence and present it as part of your defense.

Knowing and using these defenses has the potential to greatly impact the outcome of a debt lawsuit. A strong defense could lead to a dismissal of the suit or better settlement terms. Being informed about your rights and the details of the suit helps you work towards a better solution.

Do you need a lawyer when you’re sued for credit card debt?

According to Pew Research, you have better odds of success if you secure legal representation.

Researchers analyzing debt collection lawsuits from 2010 to 2019 found that less than 10% of defendants have counsel. But studies in multiple jurisdictions showed that consumers with legal representation in a debt claim were more likely to settle with the plaintiff or win their case outright.

How to settle credit card debt

Once your creditors have filed suit and you’ve received a summons, you’ve got three options to clear your debt (and your name):

• Pay in full.

• Settle for less by paying a lump sum.

• Settle for less with a payment plan.

Understand that the further this case goes, the more it costs the creditor and the greater their odds of eventually getting everything from you. 

Before a creditor files suit, they may have spent very little trying to collect from you. It’s at this stage that they might be more willing to settle for a “bird in the hand” lump sum rather than pay attorney’s fees and court costs in hopes of collecting more. 

Once they’ve incurred the expense of filing suit, you’ll probably need to offer more to make settlement offer attractive to creditors. And if you wait until they’ve gone to court and won a default judgment, expect to pony up even more. 

Even so, credits may still be willing to settle.

Why would creditors settle at all once they’ve won in court? Because there is no guarantee that they’ll get the full amount if it takes years. You could lose or quit your job, file bankruptcy or leave the country. So a lump sum upfront might still be better than a drawn-out collection process.

DIY or professional debt settlement?

There are two ways to settle credit card debt once a lawsuit has been filed – you can do it yourself or with the help of a professional. If you want to DIY your settlement, contact your creditor ASAP, preferably before you have a default judgment against you. 

You can try sending a debt settlement letter. Explain that you are not acknowledging the debt but are willing to make an offer to resolve the situation. And then lay out the details of what you can pay.

• A lump sum upfront in exchange for clearing the debt and abandoning the lawsuit. This has the biggest chance of success because it eliminates the uncertainty of repayment over time.

• Partial repayment over time with a series of payments. You want to avoid being garnished, so you’ll be negotiating a payment that you can afford and perhaps the waiver of some charges.

• Full repayment over time. Again, you’re hoping to secure a payment that you can afford and avoid the embarrassment of wage garnishment at work. 

Your other option is professional settlement with a debt relief company or debt resolution with the help of an attorney. Using an experienced pro may make the process less stressful and could get you a more favorable settlement. However, you will incur the costs of professional services.