6 Tips for Settling Credit Card Debt Before Going to Court

When Will a Debt Collector Sue You for Unpaid Debt?

Usually, lenders or credit card companies will try to collect on unpaid debt for several months before they take further action. At this point, if you haven’t made a payment, they may choose to charge off the debt and sell it to a debt collection agency or debt buyer or to file a debt collection lawsuit against you.

Most creditors consider filing this kind of lawsuit about six months after someone stops paying. You’re more likely to face a lawsuit if the creditor believes you have the ability to repay the debt and if you owe a large amount of money (more than $500).

At any point in this process, you can try to negotiate a debt settlement agreement with the creditor or debt collector. You can do this even if they’ve already brought a lawsuit against you, though you’ll also need to attend to the lawsuit.

With a settlement, you offer to make a lump-sum payment that’s less than the full amount of debt you owe. Read on to learn some tips to prepare for negotiations. 

6 Tips To Prepare for Debt Settlement on Credit Card Debt

Being sued can feel very intimidating, but understanding the legal process and how debt settlement works can give you the confidence you need to face the lawsuit. As you do so, keep these six tips in mind:

1. Remember that the other side is motivated to negotiate.

2. Research the debt and decide what your best option is.

3. Negotiate a settlement.

4. Don’t ignore court papers.

5. Accept that you can’t win them all — have a plan B.

6. Watch out for debt settlement scams.

Tip 1: Remember That the Other Side Is Motivated To Negotiate

If your credit card company is threatening to file a lawsuit for nonpayment, it probably recognizes the odds of getting paid in full are low. It takes time and money for creditors to deal with people who’ve missed their credit card payments and have unpaid debt. Going to court only increases these expenses. This is why these companies are usually motivated to come to a settlement with you.

Agreeing to a settlement can save a creditor a lot of time and money. Most creditors would rather get some of the money you owe rather than face a court battle where they might get nothing.

Additionally, credit card and debt collection companies also know that you simply may not have enough money to go around. In this case, you may be contemplating filing bankruptcy to get debt relief. If you do, credit card companies probably won’t get any money from you.

Tip 2: Do Your Research

Do some research on debt settlement and its pros and cons before you decide to make an offer. After all, knowledge is power. You’ll want to figure out how much you owe, how much money you can put toward the debt, and if settlement is the best route for you.

Research the Debt & Check the Statute of Limitations

First, make sure you know how much you owe and who owns the debt. The credit card company was the original creditor, but it may have sold the debt to a debt collection agency. Before trying to settle a debt, send a verification letter to the creditor. If you aren’t sure who currently owns your debt, check out our article on How To Find Out Which Collection Agency You Owe.

Under the Fair Debt Collection Practices Act (FDCPA), debt owners must tell you how much you owe and who you currently owe the debt to. If this information doesn’t match what’s in the court papers, this is a red flag. You may find information here you can use as a defense in the lawsuit or that may give you more power to make a settlement.

When researching the debt, also look at how old the debt is. This is important because if it’s an old debt, your obligation to pay it might be past the statute of limitations. That is, the company might not even be able to sue you to collect the money. If that’s true, then you won’t need to pay anything toward it. 

Debt collectors aren’t required to tell you if your debt is past the statute of limitations, so you'll need to research your state laws or get legal advice.

How Much Can You Afford To Put Toward a Settlement?

If you research the debt and can verify you do owe the money and it’s within the statute of limitations, you’ll next want to figure out how much money you could put toward settling the credit card debt.

Look at or make a budget to get a sense of your financial situation. List all of your important payments, like your mortgage, car loan, utilities, and taxes. Also list other debts you’re paying on. It doesn’t make sense to put a lot of money toward eliminating one debt if you’ll just be in another hole with another one.

You’ll want to be able to make a reasonable lump-sum offer to settle your debt. This may be between 40% and 60% of the total amount you owe. If you’re struggling to make ends meet, this simply may not be possible. 

If that’s the case, you may want to consider getting credit counseling to explore realistic debt-relief options. This may include filing Chapter 7 bankruptcy if you have a lot of unpaid debts and need a financial fresh start.

Decide if Settlement Is Really the Best Option for You

Finally, decide if settlement is really the best option for you.

This is especially the case if you’re considering filing bankruptcy in the near future. When you file bankruptcy, all debt collection efforts must stop. This includes debt collection lawsuits against you to collect unpaid bills, which gives you breathing room so you can have time for debt management.

If you’re considering filing Chapter 7 bankruptcy, see if you qualify to use Upsolve's free filing tool. You can also book a free consultation with a credit counselor or local bankruptcy attorney to discuss your options.

Tip 3: Negotiate the Settlement

After you’ve done your research and decided that settlement is the right option for you, it’s time to make a settlement offer. 

Expect at least two rounds of back-and-forth before you make a deal. Most people will offer something less than they can actually afford to give themselves room to meet in the middle. The other side might come back with a higher number, which can give you room to move up to your maximum number.

If you can make a lump-sum payment soon, the company might be willing to accept a slightly lower number. If you can’t pay off the credit card debt all at once, try to make an installment settlement plan to pay off the debt over a few months. Be specific with the monthly payments you can offer and the schedule of your payment plan to increase the chances of success.

If you come to an agreement, put it in writing so there isn’t any confusion down the road. Don’t make an offer you can’t afford. If the creditor accepts your number, you must give it to them.

Tip 4: Don’t Ignore Court Papers

Even if you’re in the middle of debt settlement negotiations, the owner of the debt might decide to sue you. You can continue negotiating with them, but you also now need to deal with the court case.

If they do decide to sue you for the unpaid debt, they'll have to notify you that they filed a lawsuit by sending a court summons and complaint. Some courts let them mail these documents to you, but in many states, somebody will need to hand you the papers personally. 

If you get these documents, don’t ignore them! You only have a limited amount of time to file your response to the lawsuit with the court. You may only have a few weeks. If you're sued, your local civil court should have a self-help desk to help you file the correct papers.

If you don’t file your response in time, the judge can issue a default judgment, which means that the other side automatically wins the case. You might be responsible for the full amount of the debt and the other side’s expenses, like legal fees.

Getting a court judgment also opens up collection measures such as wage garnishment or a bank account levy. This allows a creditor to take money directly from your paycheck or bank account.

Tip 5: Accept That You Can’t Win Them All

Even though most companies are willing to talk about settling with you, you won’t always be able to settle a debt. Some companies just aren't willing to budge, or sometimes the two sides are too far apart to make a deal.

In this case, you may want to consider consulting with or hiring a debt settlement lawyer. Or if you're struggling to pay multiple debts and can't settle them, consider filing bankruptcy to get debt relief.

Tip 6: Watch Out for Third-Party Debt Settlement Scams

You can negotiate a debt settlement agreement directly with the party that’s suing you. You may also see debt settlement companies advertising services or contacting you offering help. Be wary of third-party debt settlement companies. Some are legit, but many are scams.

The Federal Trade Commission (FTC) advises people to watch out for companies that charge a fee before settling your debts. You should also watch out for companies that advise you to stop paying your debts, so you can save money and pay everything off later. 

Many companies won’t explain the risks that come with this. If you stop paying debts, you can incur more late fees and penalties. Also, your credit report will reflect these missed payments, and your credit score will drop significantly over a few months.

Finally, you should reconsider any debt settlement companies that make promises or guarantees about overall success or final payment rate. Debt settlement organizations don’t have the power to force your credit card company to agree to settle at a specific rate.

Let's Summarize...

Trying to negotiate a settlement with your credit card company can seem like an insurmountable task. While you’re going through the process, try to remember that you’re not the only one who’s interested in wrapping things up quickly and quietly. Follow these six tips to educate yourself on the debt settlement process and empower yourself to negotiate a debt settlement that works for you and is acceptable to your creditor.