Being sued over unpaid debts? Here's how to settle and have your case dismissed

If you're being sued over an old debt, you may be able to solve the issue by offering to settle for less than what's owed. MAXZOIOTUKHIN/Getty Images

Receiving a court summons for a lawsuit over an unpaid debt can be jarring — even if you're well aware that your debt issues have been compounding. Whether it's due to a credit card balance that spiraled out of control or a personal loan you couldn't keep up with, seeing your name on a legal complaint can transform what felt like a financial challenge into a potential crisis. After all, wage garnishment, a judgment on your credit report or even losing assets are all potential repercussions of this type of lawsuit. 

Creditors and third-party debt collectors file hundreds of thousands of these cases every year, but they're often betting that the person they're suing won't respond, giving them an easy path to a default judgment. If you take action quickly and strategically, though, you may be able to resolve the issue before it reaches that point. And, in many cases, settling the debt can not only help you avoid court but can also result in the lawsuit being dropped entirely.

That said, settling debt once legal proceedings have started can be a bit more complex than when you're dealing with regular collection calls. Timing, negotiation strategy and the terms of any agreement all matter. If you're in this situation now, it helps to know about your options.

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Being sued over unpaid debts? Here's how to settle and have your case dismissed

If you've been served with a lawsuit over unpaid debt, you still have several potential paths forward, and it may be worth considering these options in particular:

Negotiate a settlement directly with the creditor or debt collector

Creditors and debt collectors are often open to settling for less than the full balance, even after a lawsuit is filed — especially if they think you might not have the means to repay in full or if they want to avoid the cost of litigation. So, in some cases, you may be able to negotiate a lump-sum payment or a structured repayment plan that's more manageable for you.

To do this, you'll need to contact the creditor or debt collector, or their attorney, to discuss your settlement options. They may be willing to accept significantly less than the full amount owed, and in some cases, they may accept as little as 50% of the original debt. When negotiating, be sure to also ask for a settlement that includes dismissal of the lawsuit with prejudice, meaning they cannot sue you again for the same debt. And, get everything in writing before making any payments.

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Work with a debt settlement company on negotiations

If you're not comfortable negotiating on your own, the issue is complicated or the balance is large, a professional debt settlement company may be able to help. These companies work to negotiate with creditors on your behalf, often securing lower payoff amounts than you could on your own. Some even have legal professionals on staff who can coordinate with the court to help have the case dismissed once a settlement is reached.

However, it's important to make sure you choose a reputable company to work with so you get the best outcome possible. As you compare your options, be sure to look for firms that have transparent fee structures and proven track records of resolving debt lawsuits.

Check for legal defenses or procedural errors

Before you agree to any settlement, review the details of the lawsuit carefully and ensure the debt is valid. In some cases, you may be able to have the case dismissed without paying or negotiate a better deal if there are clear problems with how the lawsuit was filed. For example, debt buyers, which are companies that purchase old debts, may be unable to provide sufficient documentation to prove they own the debt or that the amount is accurate. If that's the case, you may be able to file a motion to dismiss or force them to prove their case, which can give you more leverage to settle for less or get it thrown out entirely.

Hire a debt defense attorney

If the debt is significant or your financial situation is complex, hiring a debt defense attorney may be worth the cost. Many attorneys offer free consultations and can help you decide whether it makes sense to settle or fight the case. They can also negotiate on your behalf, draft a proper settlement agreement and make sure the lawsuit is formally dismissed in court records. Having an attorney involved also signals to the creditor that you're serious and may encourage them to settle quickly to avoid a long legal battle.

The bottom line

Being sued over unpaid debt can be stressful and frustrating, but a court summons doesn't have to lead to a judgment. You still have options for settling — even after legal proceedings begin. Whether you negotiate a deal yourself, work with a settlement company or enlist an attorney's help, it's often possible to negotiate a lower payment amount and have the lawsuit dismissed. You'll have to act swiftly, though, and push for terms that protect you financially and legally. 

Angelica Leicht

Angelica Leicht is the senior editor for the Managing Your Money section for CBSNews.com, where she writes and edits articles on a range of personal finance topics. Angelica previously held editing roles at The Simple Dollar, Interest, HousingWire and other financial publications.