How to Settle Credit Card Debt When Lawsuit Has Been Filed

Negotiating to settle credit card debt is a widely used tactic for dealing with unmanageable debt. But what if the credit card company sues you? At that point, is it too late for negotiation?

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

This information is intended for general informational purposes only. It shouldn't be taken as legal advice. For personalized legal advice, consult with a qualified attorney licensed to practice law in your state.

Understanding Credit Card 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 you owe them. The plaintiff might be:

• Your credit card company

• A debt collector that has been hired to pursue the debt

• A debt collector that has purchased the debt

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, and meet any deadlines. If you don’t, your creditor could win a default judgment. That means an automatic loss for you.

The legal process: responding to a summons and complaint

The legal process involves these steps:

• Filing an Answer: You or your attorney needs to file a written answer to the complaint with the court, explaining your side of the story.

• Discovery: Both parties exchange information about the debt.

• 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 plaintiff, you might be ordered to pay the creditor. The amount you have to pay could 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 from them) 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. 

On the other hand, the court could 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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Responding Gives You a Chance to Avoid Negative Consequences

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 move forward with legal strategies to collect the money. Once that happens, creditors are less likely to accept a lower amount. 

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 through a default judgment. This can cost you the full balance you owe plus interest and collection costs. It might even include 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 the 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 for credit card debt? Up to:

• 25% of your disposable earnings, or 

• The amount by which your income exceeds 30 times the federal minimum wage

Whichever is less. 

Besides going after income, they may be able to deplete your bank accounts as well. 

A default judgment reduces your bargaining power. In general, the more quickly you respond, the stronger your options are. 

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. This must include the name of the plaintiff, the amount it says you owe and your court date and time. 

That gives you a chance to respond. Taking action instead of hiding from the problem will make you feel better and ultimately help you move on. 

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

1. Stay calm when you receive a summons

You may never have been sued before, but it's a very common occurrence. Don’t freak out. 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 keep ignoring them or 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 their 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 vary depending on which party is suing you.

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. That leaves a lot of room for a negotiation that could leave both sides satisfied.

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. Read the complaint carefully. Do you recognize the debt? Are the amounts correct?

Besides the information in the complaint, debt collectors are required to provide you with information about the debt they say you owe. This is called validation information. Send the debt collector a written request for validation information. 

Validation information the creditor is required to provide includes: 

• The name of the creditor to whom you owe the money

• Any account numbers associated with the debt

• An itemization of the amount owed, detailing the original amount borrowed and any interest, fees and payments since then

Ask for billing statements that you can compare with your records. If the debt has been purchased, ask for the date when that occurred. 

It’s a good idea to send this request for information by certified mail and request a return receipt, or send by email so you can track its receipt.

Until it validates the debt, the collector must stop trying to collect it. That includes lawsuits. 

4. Answer your summons

This is where it’s really helpful to have legal advice. Even if you’re competent, court cases and their requirements can be complex. An error could cost you your case. If you can’t afford an attorney, try contacting your local legal aid society. The court might be able to point you to free and low-cost resources.

Read your summons and any accompanying paperwork carefully. There will be a deadline to respond. Filing an answer prevents the debt collector from getting that default judgment. You’ll respond to the complaint’s claims and put the collector on notice that you plan to fight the suit. 

A study by the Consumer Financial Protection Bureau found that nearly three-quarters of people sued for debt don't bother to attend their court hearing. That means they give up the right to defend themselves. And the result? You guessed it. Default judgment. You could be in a much stronger position to negotiate a settlement once the debt collector knows you're not just going to give up. 

5. Plan for repayment

Unless you're confident of winning in court, you should start thinking about how much of your debt you could afford to pay if necessary. This can prepare you for a judgment against you. Even before that, this process can lay the groundwork for negotiations to settle your credit card debt. 

Figure out how much of your monthly budget you can devote to paying your debt. Also, 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 negotiating position. Here's something that might surprise you. The stronger your credit and finances, the weaker your negotiating position.

If you have good credit, earn a decent living or have some savings, creditors have less reason to negotiate with you if they're confident they can win in court. They can simply use the collection tools at hand and garnish your wages or attach your bank account. 

The weaker your negotiating position, the more important it is to settle fast and before you get to court. 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 more cards. Why? Because even if the creditor wins a judgment against you, their chances of collecting the full amount are slim if you don't have the financial means to pay. 

If your finances are really bad, the plaintiff might be concerned that you'll file for bankruptcy. That means the plaintiff would have to compete with other creditors in yet another court procedure to gain a share of your limited resources.

So, the shakier your finances, the more likely a creditor may be to decide it's worth their while to avoid the cost of a trial if they can collect something from you upfront.

Negotiate a Settlement or Fight the Lawsuit?

At this point, you have to make a realistic assessment of your chances of winning the lawsuit.

If your attorney says you have a strong defense, there's little reason for you to negotiate. The plaintiff might see it the same way once you share the facts with them.

However, if there's a good chance you might lose, it's time to start negotiating. Making an offer to settle your credit card debt will have the most impact before the plaintiff has sunk a lot of time and money into pursuing the lawsuit.

Note that the options of negotiating and fighting the lawsuit are not mutually exclusive. You can make a settlement offer even while you prepare to defend yourself. In fact, the more committed you are to fighting the lawsuit, the more the plaintiff might believe that they're better off accepting an offer from you.

Legal Defenses Against Credit Card Debt Lawsuits

Below are a variety of defenses against debt lawsuits. Review them to see which might apply to your situation. Note that more than one of these might be relevant to your case. All of these defenses can be complex, so the best place to start is by discussing them with an attorney.

Statute of limitations

A statute of limitations is a time limit on how much time a plaintiff has to file a lawsuit. The statute of limitations for collecting debts varies by state, and also depends on the type of debt. 

For credit card debt, plaintiffs typically have three to six years to file a lawsuit. However, this can be longer in some states. Also, the event that marks the start of the period can be complicated. 

If this time limit has expired, you could ask the judge to throw out the case. 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 ask the judge to throw out the case. 

Insufficient 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 ask the judge to toss the case.

Errors or 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.

These defenses have the potential to impact the outcome of a debt lawsuit. A strong defense could lead to a dismissal of the suit or better settlement terms. 

Do You Need a Lawyer When You're Sued for Credit Card Debt?

A study by Pew Research found that you have better odds of success if you get a lawyer. 

Researchers analyzing debt collection lawsuits from 2010 to 2019 found that fewer than 10% of defendants have an attorney. But consumers with attorneys in a debt lawsuit were more likely to settle or win.

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:

• Pay in full.

• Settle for less by paying a lump sum.

• Settle for less with a payment plan.

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 less than the full amount you owe rather than pay attorney’s fees and court costs in hopes of collecting more. 

Once they file the lawsuit, you’ll probably need to offer more to make your settlement offer attractive. And if you wait until they’ve gone to court or won a default judgment, expect to pony up even more. 

Even so, creditors 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 you can't pay it all at once. 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?

If you decide to try to settle credit card debt, you can either attempt it yourself or hire a debt settlement company.

If you decide to try it yourself, you should contact your creditor as soon as possible. This gives you a chance at minimizing legal costs. It also guards against having a default judgment made against you before negotiations begin. 

One approach you can try is to send a debt settlement letter. Don’t acknowledge that the debt is yours, but explain that you’re willing to make an offer to resolve the situation. 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. After all, it helps to have someone negotiating for you who is experienced with the process and knows what creditors are likely to accept.