Can I Be Sued While in Debt Settlement?

Settling debt can be a messy affair. It’s natural to assume that settling the debt will stop debt collectors from harassing you, prevent them from adding new charges to your balance or, even worse, suing you for the money.

Unfortunately, that’s not the case.

You can indeed be sued for debt, even if you’re in the process of paying the debt collector. If this happens to you, rest assured there are ways to respond and potentially avoid legal action. Here’s what you need to know.

What Is Debt Settlement?

Debt settlement is negotiating with creditors or debt collectors to pay less than the full amount you owe. Settling the debt can involve making a lump-sum payment toward the debt or sending monthly payments until you’ve covered the agreed amount.

There are a couple of ways you can go about settling debt, with some being far riskier than others:

• Direct settlements: You contact the creditor or debt collector directly in order to negotiate your settlement.
• For-profit debt settlement: When you hire a for-profit debt settlement agency, you stop paying your creditors and instead send a monthly fee to the debt settlement company for up to three years or more. After that time passes, the agency will attempt to negotiate settlements on your behalf with however many creditors are involved. However, you will be at risk of getting sued at any time once debt collectors realize that you don’t plan to pay what you owe.
• Nonprofit debt settlement: Nonprofit debt settlement agencies work with you and your creditors to determine settlement amounts (typically 40%-50% of what you owe) and set up a monthly payment plan. After three years of payment with no interest charges, the remaining debt is forgiven.

Why Might a Debt Collector Sue While I’m in Debt Settlement?

A debt collector may sue you while you’re in the process of debt settlement if they believe it will help them collect more money from you.

This is especially true if you hire a for-profit debt settlement company, since going this route signals to the collector that you will not be sending any money to them for several years, and that you don’t ever plan to pay the full amount owed.

“While working with a debt settlement agency can be beneficial for some, it’s not going to be a quick process and your debtors still want their money, which can mean getting the courts involved,” says Ben Michael, attorney with Michael & Associates in Austin, TX.

By taking legal action, the debt collector can potentially get more money from you, whether by garnishing your wages, placing a lien against your property, or freezing your bank accounts. Just the threat of legal action by itself can also help them collect more, since some debtors will volunteer to fork over more cash to avoid a lawsuit.

What Can I Do if Being Sued While in Debt Settlement?

If you receive court papers while you’re in debt settlement, there are ways you can potentially prevent a lawsuit, but it’s important to be proactive. Here’s what you can do.

Don’t Ignore the Lawsuit

The worst reaction is to hide from a potential lawsuit since you could lose by default if you don’t respond. Keep in mind that a debt collector can’t say they’re going to file a lawsuit unless they intend to do so, so their communication should be taken seriously.

Instead of hiding, start by carefully reading the documents and making a note of your deadline to respond.

Verify It Is Your Account

Before you respond, make sure the details of the debt are correct and that the collector has a right to pursue you for the money. If the details they share appear inaccurate or you’re not sure it’s a legitimate debt collector, there are steps you should take.

Send them a written request to validate the information, including:

• Confirmation of who sent the communication.
• The name of the original creditor.
• The account number on the debt.
• The current balance owed on the debt.
• A breakdown of the amount owed, including interest charges and your payments.
• Information on how to reply if you believe their information is incorrect.

Challenge the Lawsuit, if Applicable

If you discover that the creditor is wrong about the debt you owe, you have the right to dispute their claim. You’ll have 30 days to file a dispute from when you receive their validation letter. Depending on the circumstances, you may want to include the following in your dispute letter:

• Details of the payments you already made and, if possible, supporting documents.
• An explanation of your debt settlement arrangement and, if possible, copies of communications about the arrangement.

The Federal Trade Commission (FTC) recommends sending the dispute letter via certified mail and paying for a return receipt. If you need legal support, they also recommend speaking to an attorney experienced in consumer law or debt collection, which you may be able to find by looking up legal aid in your state.

Work with the debt collector

If the debt is legitimate, you may still be able to come to an agreement with the debt collector without going to court. Some debt collectors even prefer to work with you directly to find a solution.

“If you reach out and ask to come up with a payment plan, they will likely stop the court proceedings and work with you. It’s typically not in their best interest to add more debt (in the form of court fees and/or lawyers) to your accounts,” Michael says.

To negotiate with the debt collector, consider offering them more money than you’re currently paying and/or a faster payment timeline.

For example, if you’re working with a for-profit debt settlement company, offer to cancel your settlement proceedings and resolve the debt by negotiating a lump-sum payment. As an added bonus, if you go this route you can follow up by getting a refund on your payments to the debt settlement company (minus fees for their services) and apply the money to your lump sum amount.

Talk to Your Debt Settlement Counselor

If you’re on a nonprofit debt settlement plan, another important step is to reach out to your debt settlement counselor for help. This person is in charge of negotiating with creditors on your behalf and they may be able to intervene to clear up the confusion and prevent a lawsuit.

Consider Filing for Bankruptcy

If you’re not able to reach an agreement with the debt collector and you need to prevent a lawsuit, filing bankruptcy could be the next step.

While filing for bankruptcy is always a last resort, filing will stop all efforts to collect your debt and can result in having some or all of your debt legally dismissed.

Bankruptcy in Debt Settlement

Bankruptcy has major drawbacks, but it also offers unique benefits to people who file. Before you consider filing bankruptcy, keep these details in mind:

• Debt collectors must halt all collection attempts once you file, including legal action.
• You’ll have to pay $300 or more in court fees unless you apply and qualify for a fee waiver.
• Bankruptcy can do severe negative damage to your credit scores.
• Fees for a bankruptcy attorney range anywhere from $1,500 to $4,000.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy, or liquidation bankruptcy, can eliminate unsecured debt, which is debt not backed by collateral. That generally includes personal loans and credit card debt. Chapter 7 will show on your credit reports for 10 years.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is for people earning regular income. This option puts you on a 3-5 year repayment plan and forgives your remaining debt after the plan ends. Chapter 13 will appear on your credit reports for seven years.

Make Sure To Take Action if You’re Sued While in Debt Settlement

If you find out that a debt collector wants to sue you, don’t panic. “It seems scary, but most collectors simply want the money they are owed and are more than willing to work with you,” says Michael.

You have options for avoiding a lawsuit, but they become limited if you ignore the creditor and let time pass without taking action. Instead of avoiding the problem, try getting the debt validated, disputing debt you don’t owe, and/or negotiating a new debt settlement arrangement with the creditor.