If you lose a credit card debt collection lawsuit, the creditor will hold a legal judgment against you. Not only does the judgment damage your credit, it gives your creditor the right to take payment from you by force through garnishment. Depending on your state's laws, the creditor may even have the right to seize certain assets. For many debtors, negotiating a settlement outside of court is preferable to facing the consequences of a potential judgment.
Negotiating a Settlement
Negotiating with the creditor before it sues is much easier than doing so after the company files its lawsuit against you. Some companies -- usually collection agencies -- threaten to file lawsuits as a scare tactic, without actually intended to seek legal recourse. If the creditor has already filed suit, however, it is willing to pursue you to the fullest extent of the law for your defaulted credit card debt. The creditor knows that a judgment allows it to collect the full amount you owe, plus court fees, and thus has little incentive to negotiate a lower balance with you.
Judgment Proof Debtors
Creditors will typically only negotiate a settlement after filing a lawsuit if they cannot use a court judgment to force you to pay. If you are "judgment proof," your assets are exempt from judgment collection and the creditor is no better off after the lawsuit than before. One example of a judgment proof debtor is someone who is unemployed and whose income consists solely of alimony and Social Security benefits. Both alimony and Social Security are exempt from seizure following a judgment. Thus, the creditor may opt to drop its lawsuit and negotiate rather than pursuing a judgment it cannot collect.
Illegal Lawsuits
Your state sets a time limit on how long a creditor has to file suit against you before your credit card debt "expires." While the creditor can still collect the debt, filing a lawsuit against you after this mandatory statute of limitations expires is illegal. Unfortunately, that does not stop certain companies from trying. Creditors can still collect judgments received from illegal lawsuits.
If the lawsuit was filed after the statute of limitations on your credit card debt expired, you have an affirmative defense that will result in the court dismissing the creditor's suit. This gives you leverage to force the creditor to either accept a settlement or not collect the debt at all.
Settlement Amount
The settlement amount you can successfully negotiate depends upon a variety of factors including the company's policies and the amount you originally owed. In general, you can negotiate a lower settlement if the creditor is less likely to collect via a lawsuit. Expect to pay more if your creditor can force you to pay off the full balance with a court judgment.
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