Just because the creditor has filed a lawsuit does not mean it is too late to work something out with them. Once you are served you will have the name and contact information for the law firm representing the creditor. You can call them and see if they are willing to work something out regarding the debt.
The two basic options that may be available to you are:
- Offer a lump sum settlement. If the debt has been unpaid for a long time and you do not have much the creditor can grab from you (via garnishment of wages or money in a bank account) then you may be able to offer them a lump sum to settle the entire debt. This would be a negotiation where you start with an offer and work toward settling the entire obligation. An example: you owe Capital One $10,000 and the debt has been unpaid for 5 years. They finally file a lawsuit, but even if they get a judgment, you have nothing they can seize (you have Social Security Disability as your income and rent an apartment). In those circumstances, time is on your side. You can make an offer ($500) and if they don’t take it, you can call them back with the same offer 6 months later. Eventually, they will take something as it is better than nothing. When they accept the settlement, you will want to demand the creditor file a “Satisfaction” with the court, closing the loop on the lawsuit.
- Offer a “stipulated judgment with a covenant not to execute.” In this scenario, you are offering to sign off on a judgment, if they agree to keep it in their files and do nothing with it, while you make an agreed upon monthly payment to them. This has a couple of benefits to you (a) you are getting out in front of the situation and controlling the outcome with a payment you can afford; and (2) you are preventing additional fees and costs getting tacked on to the original debt (a garnishment of wages lasts 3 months then the creditor has to renew it. They get to charge you a fee every time they renew it, thus adding to the underlying debt). When you make your final payment, you will want to demand the creditor file a “Satisfaction” with the court, closing the loop on the lawsuit.
Understand that the law firm or collection agency is not in the business to be nice to you and that they will probably treat you very poorly during your conversations with them. Keep your goal in mind throughout and don’t let their tactics get to you. Your job is to settle the debt or get a payment plan in place – not make friends.
If the creditor refuses to work with you or be reasonable, feel free to reach out and see what filing a bankruptcy has to offer.