Settling a debt lawsuit

Many debt lawsuits end in a settlement: you and the plaintiff agree on an amount or a payment plan, and the case ends. Settling can make sense if you owe the debt and can't win. But a settlement is a contract, so get it right, and keep your answer deadline while you talk.

Answer first, then talk

Talking to the plaintiff's lawyer does not stop your deadline. If you don't answer on time, the plaintiff can ask for a default judgment even while you are negotiating. File your answer by the deadline on your summons, then talk about a settlement. Use your state's deadline calculator.

Know what they can prove

Before you agree to pay, ask for the documents: the contract, proof that the plaintiff owns the debt, and an itemization of the amount. The free letter in how to answer a debt lawsuit writes the request. If the debt is too old to sue on, or the plaintiff can't prove it owns it, you may not need to settle at all.

Kinds of settlement

• A lump sum. You pay less than the full amount at once, and the plaintiff agrees the debt is settled in full.
• A payment plan. You pay over time. Ask what happens if you miss a payment.
• A dismissal. Ask that the case be dismissed when you finish paying, and ask whether it will be dismissed with prejudice, which means it can't be filed again.
• An agreed judgment. Some settlements ask you to agree to a judgment. Then the plaintiff could garnish your pay or bank account if you miss a payment. Read it carefully before you sign.

What to say when you call

Call or write to the lawyer named on the summons. Give the case number and say you want to talk about settling. Say what you can pay, and how: all at once or per month. Don't agree to an amount you can't keep paying, and don't give your bank or card details on the phone. Ask the lawyer to send the offer in writing so you can read it, and ask legal aid if any term is unclear.

Get it in writing

Before you pay anything, get the agreement in writing. It should name the case, the amount, the due dates, what happens to the case and the rest of the debt, and how the account will be reported. Pay in a way you can prove, and keep every receipt. Don't give anyone access to your bank account.

Mediation

Some courts offer mediation, where a neutral person helps both sides talk. Our state guides describe a court mediation or settlement program in 20 states, for example Alaska, Colorado, Connecticut, District of Columbia and Florida. Ask the clerk if your court has one.

Taxes on forgiven debt

If the plaintiff forgives part of the debt, the forgiven amount is generally taxable income, and you may get a Form 1099-C. There are exceptions, for example if you were insolvent, which means you owed more than you owned (IRS Topic No. 431). Ask a tax helper if you get a 1099-C.

If you can't pay anything

Tell the lawyer. Some money, like Social Security, is protected from collection even after a judgment (31 CFR 212.6), and many states protect wages and some property. Read how to protect your wages and bank account. A legal aid office can help you decide what to offer, or whether to offer anything.

Step by step

1. File your answer on time.
2. Ask for the documents and check the amount.
3. Decide what you can really pay.
4. Get the full agreement in writing before you pay.
5. Make sure the case is dismissed or closed as agreed, and keep all papers.

This is general information, not legal advice. Each state page lists free legal help.