Should You Settle Debt or Go to Court?

Going to court: Understanding the litigation path

When settlement negotiations fail or aren’t pursued, creditors may file a lawsuit to recover the debt. This legal action can result in a court judgment, which gives the creditor powerful tools to collect the money owed, including wage garnishment, bank account levies, and property liens.

What happens in court

1. The litigation process typically begins when the creditor files a complaint in civil court. You’ll be served with legal papers that outline the debt and the creditor’s claims.
2. You then have a limited time, usually 20 to 30 days depending on your state, to respond with an answer to the court.
3. Many people make the critical error of ignoring the lawsuit, leading to a default judgment in favor of the creditor. This gives the creditor immediate legal authority to pursue collection through various means. However, if you respond appropriately, you may be able to challenge the lawsuit on various grounds.

Potential defenses

Several legitimate defenses may be available, depending on your circumstances:

• The statute of limitations is one of the most common defenses. Most states have a statute of limitations on debt collection that ranges from three to six years, though some states allow longer periods. If the debt is beyond this timeframe, you may have a complete defense to the lawsuit.
• You might also challenge the creditor’s ability to prove the debt is yours and that they have the legal right to collect it. This is particularly relevant when dealing with debt buyers who purchase charged-off debts from original creditors. These companies must provide documentation proving the debt’s validity and their ownership of it.
• Other potential defenses include violations of the Fair Debt Collection Practices Act, improper service of the lawsuit, or errors in the amount claimed. If the debt resulted from identity theft or fraud, you would have strong grounds to contest the lawsuit.

Advantages of going to court

Fighting the lawsuit in court provides several potential benefits:

• You might win the case entirely if the creditor cannot prove their claims or if you have valid defenses. Even if you don’t win outright, the litigation process often leads to more favorable settlement negotiations, as creditors face the uncertainty and expense of trial.
• Court proceedings also provide formal legal protections and procedures that aren’t available in informal settlement negotiations. You have the right to discovery, which means you can request documents and information from the creditor to build your defense. This transparency can sometimes reveal weaknesses in the creditor’s case.
• Additionally, some creditors may be willing to accept more favorable settlement terms once they’re engaged in litigation, recognizing the costs and risks associated with taking the case to trial.

Disadvantages of going to court

The litigation path also carries significant risks and disadvantages:

• If you lose the case, you’ll likely owe the original debt amount plus interest, court costs, and potentially attorney fees. The resulting judgment is a public record that will appear on your credit report and can be renewed for additional periods in many states.
• Legal proceedings can be lengthy, stressful, and expensive, particularly if you hire an attorney. Even if you represent yourself, you’ll need to invest considerable time learning court procedures and preparing your defense.
• The emotional toll of ongoing litigation can be substantial, particularly given the power imbalance between individual debtors and institutional creditors.
• Court judgments also provide creditors with powerful collection tools. Depending on your state’s laws, judgment creditors may be able to garnish your wages, levy your bank accounts, or place liens on your property. These remedies can have immediate and severe impacts on your financial stability.

Factors to consider in your decision

Several key factors should influence your decision between settlement and litigation:

• Your financial situation is paramount. If you have stable income and assets that could be subject to garnishment or levy, settlement might be more attractive. Conversely, if you’re judgment-proof due to limited income and assets, you might be more willing to risk litigation.
• The age of your debt is also crucial. Older debts may be beyond the statute of limitations, making litigation defense more viable. Additionally, older debts are often purchased by collection agencies for pennies on the dollar, making them more willing to accept lower settlement amounts.
• The strength of the creditor’s case matters significantly. If the creditor has clear documentation proving the debt and your responsibility for it, settlement might be preferable to almost certain loss in court. However, if there are questions about the debt’s validity or the creditor’s right to collect it, litigation might be worth pursuing.
• Your state’s laws regarding debt collection, exemptions, and statutes of limitations should also factor into your decision. Some states have more debtor-friendly laws that provide better protections against garnishment and collection activities.

The settlement process: A step-by-step approach

If you decide to pursue settlement, approach the process strategically:

1. Begin by gathering all relevant documentation about the debt, including original credit agreements, account statements, and any correspondence with creditors or collection agencies.
2. Determine what you can realistically afford to pay. Consider both lump-sum payments and payment plans, as creditors may be more willing to accept lower amounts for immediate payment. Don’t agree to pay more than you can afford, as this could lead to further financial difficulties.
3. Initial settlement offers should typically be low, often 10% to 20% of the total debt. Creditors will likely counteroffer, and you should be prepared for back-and-forth negotiations. Be patient but persistent, and don’t be afraid to walk away if the terms aren’t acceptable.
4. Once you reach an agreement, get everything in writing before making any payments. The settlement agreement should clearly state the payment amount, timing, and that the payment will satisfy the debt in full. Avoid agreements that leave room for additional collection activities.

Preparing for court: Building your defense

If you choose to contest the lawsuit, your preparation is crucial:

1. Carefully review all documents related to the debt and the lawsuit. Look for inconsistencies, missing information, or violations of debt collection laws.
2. Research your state’s laws regarding debt collection, including statutes of limitations, exemptions, and procedural requirements. Many courts have self-help resources for pro se litigants, and nonprofit credit counseling agencies may provide guidance.
3. Consider whether you need legal representation. While hiring an attorney can be expensive, the cost may be justified if the debt amount is large or if you have complex defenses. Some attorneys work on contingency or offer payment plans for debt defense cases.
4. Prepare your written response to the lawsuit carefully and file it within the required timeframe. Your answer should address each allegation in the complaint and raise any applicable defenses.

Long-term credit impact considerations

Both settlement and court judgments will negatively impact your credit score, but the long-term effects differ:

• Settled accounts typically remain on your credit report for seven years from the date of first delinquency, while court judgments may appear for longer periods depending on state law.
• Generally, court judgments are viewed more negatively than settled accounts, as they indicate a creditor had to resort to legal action to resolve the debt.

Regardless of which path you choose, focus on rebuilding your credit afterward. This includes making all future payments on time, keeping credit utilization low, and avoiding new delinquencies. Over time, the negative impact of either settlement or judgment will diminish.

The bottom line

The decision between settling delinquent credit card debt and going to court is highly individual and depends on your specific circumstances, financial situation, and risk tolerance. There’s no universally correct answer, and what works for one person may not be appropriate for another.

Regardless of which path you choose, the key is to make an informed decision based on a realistic assessment of your situation and to act promptly rather than ignoring the problem. With careful consideration and appropriate action, you can navigate this challenging situation and work toward a better financial future.

There’s always JG Wentworth…

If you’re struggling with unsecured debt we might be able to help. If you owe $10,000 or more there’s a good chance you’ll qualify for the JG Wentworth Debt Relief Program.* Some of our program perks include: 

• One monthly program payment 
• We negotiate on your behalf 
• Average debt resolution in as little as 24-60 months 
• We only get paid when we settle your debt  

If you think you qualify for our program, give us a call today so we can go over the best options for your specific financial needs. Why go it alone when you can have a dedicated team on your side? 

*This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.