HOW TO SETTLE A COLLECTION LAWSUIT

No one is immune from financial hardship. Life is unpredictable. Maybe you lost a job. Maybe it was a divorce, health issues, or some other unexpected, and costly, event. Almost everyone has to deal with financial strain at some point. When there’s not enough money to satisfy every debt, the highest priority debts usually get paid first. This means that payment obligations on credit cards, auto loans, and other personal loans, are either paid last, or not at all. After the flurry of phone calls, emails, texts and collection letters stop, these debts may have been forgotten as you worked to rebuild your credit and restore your financial health. Now, months or years later, you’ve been served with a collection lawsuit on an old debt. You’d prefer to work out a reasonable settlement, but aren’t sure where to start. This firm has settled thousands of debt collection lawsuits and knows how to avoid common pitfalls and obtain favorable outcomes for its clients.

Collection Lawsuits

If ignored or mishandled, collection lawsuits usually become money judgments. Money judgments are reported to credit agencies and will lower your credit score. Judgments are most often enforced and collected through garnishment of the debtor’s paycheck or bank accounts, with little or no prior notice. Judgments also create liens against your home or other real estate that have to be paid before you can sell or refinance. Hiring a lawyer with experience defending against debt collection offers the best chance of reaching a settlement and avoiding a judgment; but at what cost?

Hire a Lawyer or Handle it Pro Se

Nothing feeds the “scarcity mindset” quite like debt collection. A debtor who’s been sued for $10,000.00 on an old credit card may see legal fees as an unjustifiable cost that gets added on top of the amount of the debt owed in the lawsuit. Maybe the creditor has even offered settlement at a discounted amount if you sign now and agree not to fight the lawsuit. What more could a lawyer do for you?

Negotiating Debt Settlements & Assessing Risks & Rewards

Collection lawsuits, like all lawsuits, create risk and uncertainty for all parties involved. Settlements are a way to minimize the risk and uncertainty posed by lawsuits. The best settlements are based on an accurate assessment of the risks faced by each party, and how those risks affect the value of each party’s claims, or the reasonableness of their defenses. Assessing the optimal settlement range in a collection lawsuit requires a working knowledge of civil procedure, the rules of evidence, specialized knowledge of contract, collection, and consumer rights law, and a familiarity with the business of debt collection and the usual practices and policies of creditors across many types of consumer debts. The pro se debtor who reaches a quick settlement at $8,500.00 on a $10,000.00 debt, paid in monthly installments, may believe they saved money by not hiring a lawyer. In the overwhelming majority of cases, they would be wrong.

Creating Bargaining Power

Debt defense lawyers understand the factors that commonly affect settlement of a collection lawsuit. One factor is the “time-cost differential.” A lawyer who handles 5000 collection lawsuits per year and works 2000 hours per year, has an average of 2.5 hours to spend on each case, from the initial intake through collection of the final payment or other termination of the case. For that reason, a pro se debtor will most likely be speaking with a collection agent at the law firm who lacks authority to negotiate and is unconcerned with litigation risks, the probability of successful collection efforts, or the time and effort required to obtain a money judgment. In this way, the “time-cost differential” works against the pro se debtor in a collection lawsuit. A debt defense lawyer makes the time-cost differential work in the debtor’s favor, by proactively engaging in the litigation effort, and substantially increasing the amount of time required to resolve the collection lawsuit, while also increasing the risk of an unfavorable, or unprofitable, outcome.

Leveraging Specialized Knowledge of Consumer Rights & Debt Collection

The lawsuit claims you owe a specific dollar amount. How did they arrive at that amount? Is it accurate? Who knows? Many people, including judges, don’t understand, or even care to understand, the consumer debt industry, consumer financing, or the securitization and sale of consumer receivables and debt securities. Even fewer understand the intricate web of state and federal statutes, regulations, and agency rules imposed on consumer creditors and lenders. This web of legal requirements concerns every act and transaction that takes place during the account relationship between the creditor and debtor, from the initial application, to the collection of the final payment. Being able to spot violations of these laws, and use them to the debtor’s advantage, is just one of several ways that debt defense attorneys negotiate more favorable settlements for their clients.

Drafting & Structuring Debt Settlements

A debt settlement is a contract. In all contracts, “the devil is in the details.” What’s included in the contract can be less important than what is not in the contract, and vice versa. Anyone who can read can understand what a contract says. That doesn’t mean they understand why the contract was written one way as opposed to another, or are aware of optional and/or additional contractual provisions that should be added, or see provisions that should be removed or reworded. Drafting a contract is as much about anticipation as it is about communication. If done properly, contracts drafted by collection lawyers will always work to the benefit of the creditor in the event of some future dispute concerning a party’s performance under the contract. Without an experienced debt defense lawyer of their own, debtors are at the mercy of the collection attorney. A lack of familiarity with consumer debt settlements provides debtors with no way of knowing how or why they fail, what happens when they fail, or how to prevent the failure from ever occurring. A well drafted settlement agreement protects a debtor by making sure the case stays settled and the debt is eliminated completely, without unforeseen headaches and additional costs down the road.

Establishing Optimal Payment Terms

When a debt settlement involves a payout, there is always tension, or a “tug of war,” when it comes to price and time. The debtor wants to pay a lower amount over a longer period of time. The creditor wants a higher amount paid in a shorter period of time. In the absence of other factors, the debtor receives the greatest price reduction and the creditor receives payment in the shortest time frame where there is an immediate lump sum payment of the settlement amount. The usual settlement involves a compromise where the debtor pays more than they would in a lump settlement, and in exchange, the creditor agrees to break the amount into monthly payments over a longer period of time. The perfect debt settlement involves a payout that accurately represents the true “value” of the creditor’s claim, allows for monthly payments that do not place financial strain on the debtor, and are paid over as short a time period as possible. The debtor may benefit from low monthly payments, but longer payment terms increase the risk of some unforeseen problem that results in a breach of the agreement.

Potential Problems

Imagine that a lawsuit seeking $100,000.00 is settled for $10,000.00, with payments of $100.00 per month for 100 months. Great deal, huh? The hitch is that, like most debt settlements, the amount owed will automatically convert to a judgment for $100,000.00, minus any payments received, if the debtor fails to make timely payments. Under the agreement, payments are made directly to the collection law firm, by either mailing a check or using an online payment option. 100 monthly payments will take 8 years, 4 months. What if the collection lawyer dies, or retires, or moves without notice? What if the account is sold after settlement, and you throw away the mailed notice, thinking it’s junk mail? What if you mail a check in the 99th month and it’s inexplicably delayed for 3 weeks before being received? All of these examples are based on things that have actually happened.

Debt Settlements: Contract, Judgment, or Both?

Longer payouts are also disfavored by the courts. Judges love when cases are settled. Why? Because they get to close the case and get it off their docket. Settlements with long term payouts mean the case remains unresolved for years as an open case on the judge’s docket. This is a negative for judges in many ways. A judge’s performance is evaluated in many ways, including the average length of time a case remains open on their docket. Every court docket has a high percentage of collection claims. No judge wants hundreds of open settlements lingering on their dockets for years, any of which could go bad and require additional court time and resources, after years of dormancy. Additionally, cases that remain open for an extended period of time with no activity, may automatically be unenforceable, as a matter of law. In GA, the time period is 5 years. If a debtor wants a payment term that is more than 90-120 days, the settlement is most likely going to be in the form of a “consent judgment” that the creditor agrees not to enforce as long as timely payments are received. If payments are missed or late, the consent judgment can be enforced like any other money judgment, and for the full amount claimed in the complaint.

Mitigating Risk With Specialized Financing Options

When a debtor facing a collection lawsuit asks for an extended time period to pay the settlement, and most of them do, how can a debt defense lawyer get the lowest settlement amount, eliminate the risk of default associated with an extended payout, terminate the lawsuit, and also avoid a consent judgment that damages your credit? For those with the ability to do so, obtaining immediate financing to pay off a settlement can accomplish all of these goals. While settlement financing involves trading one debt for another, the debtor is trading a larger debt for a smaller debt.

Conclusion:

Settling a collection lawsuit is easy. Negotiating a favorable debt settlement with greater price reductions, while avoiding common traps and pitfalls, requires specialized legal experience and knowledge. If you’ve been served with a collection lawsuit, we can help.