How to Settle Credit Card Debt Before Going to Court

Disclaimer: We are not qualified legal or tax professionals and are not giving advice. Always speak with a qualified professional before making any legal or financial decisions.

Facing a lawsuit over credit card debt can be a daunting and stressful experience, often fraught with uncertainty and the fear of court appearances. However, there's a beacon of hope for those caught in this predicament.

Settling your credit card debt before it reaches the courtroom not only spares you the additional time and expense but also offers a pathway to financial recovery. This guide is designed to navigate you through the process of negotiating with creditors, leveraging your rights, and ultimately finding a resolution that avoids the legal complications of a court case.

From understanding the critical timelines to utilizing effective negotiation strategies, we'll provide you with the insights you need to address your debt head-on and start anew.

If you're ready to talk now, skip the article and click here for a free consultation with our debt specialist.

Timeline for Collections or Lawsuit

Most credit card issuers and other creditors will try to collect for about six months after you stop making monthly credit card payments and delinquency occurs. At six months, they generally will either sell or assign your debt to debt collectors or possibly attempt to sue you to collect.

These situations are called charge-offs and means that the original creditor considers your debt non-collectible. This does not mean that you no longer owe the debt, it just means that your headaches are about to increase. 

If you have received notice that the company intends to sue or are approaching the six-month mark, you should contact them and ask for a settlement. This means that you will pay less than you owe on the outstanding debt, usually in a lump sum.

If the company or collection agency is convinced that you can not pay the debt, they may be willing to settle.

Notice of Intent or Demand Letter and Court Summons

If the creditor is considering suing you, you will receive a notice of intent (otherwise known as a demand letter) to sue. We cover this more here, but the short version is that a notice of intent comes from the creditor and details the debt, what you owe, and what they plan to do if you do not pay.

The summons is a legal document issued by a court, explaining that you are being sued.

Do not ignore either one, but especially, do not ignore a court summons! You can end up with an arrest warrant, wage garnishment, property seizure, and/or money taken from your bank accounts.

What to Do with a Demand Letter or Court Summons

Your first step with either document is to ensure that the debt is yours, the amount is correct, and the debt is not older than your state's statute of limitations. You also may wish to retain an attorney in your state to get a legal opinion on the best course of action.

If there are any errors in the demand letter, immediately contact the company or debt collector in writing and provide copies of documentation as to why the debt is in error. Always ask for a written validation letter from the debt collection agency.

If the court summons is an error, you need to file a “notice of intent to defend” with the court system within the specified period of time. You will also file a notice of intent to defend if you plan to contest the debt in court because you can not or do not intend to pay.

The instructions for filing a notice of intent to defend can be found in a previous article. 

Debt Settlement

If you want to try debt settlement, there are several factors to consider. One is if the debt is with the original creditor or a debt buyer. The creditor may be less likely to settle for a lump sum payment, but it is always worth asking.

Debt buyers generally have purchased your debt for less than was owed and may be more likely to settle.

Another is the age of the debt. In general, if it is over six months old, it will be held by a debt collector. The older the debt, the less the debt buyer paid for it and the more likely they will be willing to settle.

Keep in mind that debt buyers buy and sell debt. Your old “zombie” debt may make the rounds of debt buyers and show up periodically. 

Another factor is that you must be able to show that you can not pay the debt in full. One measure the company or debt buyer will look at is debt service.

What is Debt Service?

Debt service is the amount of money required to cover both the interest and principal on a debt for a specified period of time (usually annually). Both lenders and debt collectors look at this and calculate a ratio before making a loan or agreeing to settle. 

The debt service ratio has a very simple formula. You need to know your total annual net income (that's what is left after taxes are taken out) and your total annual debt payments. You then divide your income by debt payments.

If your annual debt service ratio is greater than one, a debt collector will assume that you are capable of paying the debt in full. 

Negotiating a Settlement

If you want to negotiate a debt settlement, there are three ways to go about the negotiations.

First, you can do a DIY debt settlement yourself. This takes a lot of organization, perseverance, and time. You will need to make the offer and prove your case with either the company or their lawyer.

It may take several rounds of offering either monthly payments or a lump sum payment to get the company to settle. Always build into the credit card settlement agreement that the company will report “paid as agreed” to the credit bureaus, rather than “settled.”

For more information about debt settlement and credit scores, follow this link. 

Another option is to hire a debt settlement lawyer to represent you to both the company and in court. This can get very expensive very quickly. However, if you are sued, legal advice can be extremely valuable!

The third option is to contract with a debt settlement company to negotiate on your behalf. A reputable debt settlement company knows which creditors are more likely to settle. Always check accreditation's to avoid debt settlement scams.

In addition, the debt settlement company will help you to understand the outcomes of the settlement, such as income taxes on the forgiven debt. They should also help you to learn how to budget and avoid getting into debt in the future. 

Most debt settlement companies specialize in unsecured debt like credit card bills, personal loans, and medical bills.

If this third option, a debt settlement company, sounds like the best choice for you, Pacific Debt Relief is a well-respected and award-winning debt settlement company.

If you are not certain, give one of our debt specialists a call. They will clearly explain your options so that you can make the best decision for your unique situation. There is no obligation and no charge for the initial phone call. 

Important Facts about Debt Settlement

Debt settlement may sound easy and like a good deal. However, there are several potentially serious consequences to debt settlement that you need to understand before attempting to settle.

First, the IRS views the forgiven debt as taxable income and you must pay income taxes on that amount. This could land you with a sizable tax bill. You may want to speak with a qualified accountant about this potential financial situation as it could create more financial hardship for you.

Debt settlement will temporarily harm your credit history. First, you must stop making even the minimum monthly payment to convince a creditor or debt collectors that you are serious. As timely payments are the number one factor in your credit scores, this immediately hurts you.

Unless you get it in writing, the creditor will report the debt as settled. This appears on your credit reports for up to seven years and does not look good to future consumer credit lenders.

At the bottom line, debt settlement is an option to be tried before bankruptcy but after all other avenues are exhausted.

Debt Validation

Before paying or settling any debt, be sure to validate that you actually owe the amount listed. Send the collection agency a debt validation letter via certified mail requesting documentation that proves the debt is yours and the amount is accurate. Carefully review the proof provided and ensure it lines up with your records. If the debt cannot be validated or there are errors, notify the agency in writing.

Statute of Limitations

Each state has statute of limitations that determine how long a debt collector has to sue you to collect on a debt. In many states, this window is between 3-6 years. To see the statute of limitations in your state, check our guide here. If the statute of limitations has expired on a debt, collectors may not sue you for it.

Bankruptcy

While bankruptcy stops collections lawsuits in their tracks, this debt relief option has lasting consequences. Bankruptcy remains on your credit report for 7-10 years, causing significant score damage. You may struggle to qualify for loans or credit cards at reasonable rates during your financial recovery. Evaluate these pros and cons carefully before deciding if bankruptcy is right for you.

Prioritizing Debts

If you cannot afford to repay all outstanding debts, be strategic in choosing which to address first. Refer to our debt prioritization guide to understand which debts are most time sensitive or likely to trigger legal action soon. Pay these urgent debts first while negotiating payment plans on the others. This balanced approach helps prevent collections calls and lawsuits while you get back on track.

FAQs