Overview of a Debt Settlement Lawsuit

A debt settlement lawsuit can occur when a person or company is unable to pay their debts. Often, debtors will uses a third party in an attempt to settle their debts and appease creditors. Debt settlement companies take it upon themselves to negotiate with creditors to help settle debts—often for less money than the actual debts accrued. The best debt settlement companies have strong relationships with a variety of creditors, and hire lawyers out-of-house or in-house to deal with lawsuits from creditors.

Although debt settlement companies can provide peace of mind and breathing room for people whose debt is too much to handle and need debt relief, they can't always protect debtors from lawsuits from their creditors. Creditors have the right to threaten and pursue legal action against parties with unpaid debts—and many times, these lawsuits are successful.

How Do Debt Settlement Lawsuits Arise?

When a debtor cannot afford to make payments, credit companies will often issue written warnings or make telephone calls alerting the party that their accounts must be paid. Lawsuits follow an interval of time (decided by the creditor) during which debts are not settled. A suit may arise due to oversight on the part of an individual or business; however, more often than not lawsuits come about when a person has simply exhausted all debt settlement options for repayment.

Sometimes, companies will threaten lawsuits because it's easier to collect from parties under pressure—even when suing wouldn't make financial sense for them. When bankruptcy is considered as an option for debtors, collectors often will not sue, as they are responsible for lawyer's fees and banks will not make payments for the bankrupt party. The threat to sue is not the same as filing a suit: that process begins when a complaint is served.

Overview of a Debt Settlement Lawsuit

Collectors who decide to sue must file a complaint. This complaint must then be served to the debtor, after which the debtor has thirty days to file an answer. Creditors often try to collect the sum of the debt during this period of time, since collection is easier and less costly than litigation. During this period, collectors will often hire third parties called "skip-tracers" whose job it is to find numbers and addresses of family members and loved ones. They then threaten debtors through their family members, applying pressure for someone to pay the bill. Sometimes skip-tracers will provide the creditor with cellular phone information and begin to threaten debtors by calling frequently. (Doing so is actually illegal under the Telephone Consumer Protection Act, however, and victims are entitled to $1500 per intentional phone call made.) After a response is made to the court, a court date will be set.

A debtor may then try to settle with a creditor by coming up with an agreement—either to pay a smaller portion over an extended period of time, or to pay a percentage of the debt as a lump sum. As mentioned before, such an arrangement often benefits lenders, as the fees associated with a lawsuit can be quite high.

Penalties can be high if creditors win a suit against a party. If a debtor, for example, defaults without contacting the court, the creditor automatically wins the suit, and may collect against the income and assets of a debtor. Vehicles, property and wages may be garnished as a result of a lawsuit.

Debt Settlement Laws And Regulations

By law, there are many things that a debt collector is prohibited from doing. A collector may not harass a family or call at unreasonable times—usually between 9pm and 8am. A collector may not share information about a debtor with any parties other than a debtor, a spouse, or a lawyer, and they may only contact family members once in order to get necessary contact information. Moreover, without verification, a lender may not contact a party repeatedly if the party sends a letter expressly stating that bills are not owed.

Regulations are in place that prevent debt collectors for acting in a harassing or abrasive manner. They may not use foul language nor threats of injury, arrest, or seizure of property until permitted by law. Any false statement, claim or misrepresentation on the part of the collector is punishable. Most federal benefits are protected from garnishment, including social security and veterans' benefits.

Finding Legal Help

When debt settlement breaks down into litigation, it is imperative for both parties to hire legal counsel. A creditor should get advice from legal counsel to determine when it is advantageous to sue, and what rights they have to garnish wages or cease property. A debtor must consult with an attorney to understand their options, including debt negotiation or bankruptcy, in order to avoid potentially costly lawsuits that may result in a loss of assets and income.