If you are over your head with money struggles, debt consolidation can be a great way to get out of debt and avoid legal action from creditors. It involves combining multiple debts into one, making it easier to manage and pay off. But will it stop a lawsuit?
Are you eligible for debt relief?
We may be able to help. It’s easy and free to find out.
Table of Contents
Debt consolidation will not automatically stop a lawsuit
Debt is a contract. When you fail to repay your debt, you’re violating the terms of your contract. However, you can only be sued in civil court. Failing to repay a debt is not a criminal matter. Because of this, you will not be jailed for failing to repay your debt (though you could be jailed for other reasons, like ignoring a court summons).
Debt consolidation will not automatically prevent a lawsuit, nor will it stop a suit that’s already in process. As long as you still owe the debt, a creditor can file a collection lawsuit while you are consolidating debts. And if you’ve already been sued, the process will continue until the case has been resolved.
Debt settlement also won’t stop a lawsuit that’s already been filed. If legal action has been taken against you, consider hiring a debt settlement attorney.
Pro tip: When threatening a lawsuit, most creditors simply want a borrower to contact them and set up payments based on how much the borrower can afford. If a creditor tells you they’re considering a suit, give them a call and see whether they’re willing to work with you. It will be in your best effort to take whatever steps you can to prevent them from actually suing you.
Why won’t debt consolidation stop a lawsuit?
Working with a debt consolidation or settlement company does not guarantee that your creditors or debt collectors will work with you. Many debt collection agencies want to make money as quickly as possible. Often that can mean taking legal action because a court case could lead a judge to garnish your wages.
Debt consolidation companies work to get you approved for a debt consolidation loan that will take care of any current debts you owe. It is similar to paying off your debt in full, except you will then have to repay the loan instead of the debt collector. These loans usually have lower interest rates and can be used to pay off credit card debt and other unsecured debts. If you can successfully consolidate debts, it will likely prevent a lawsuit. However, it will not help if you have already consolidated your debts and the debt named in the lawsuit was not included.
READ MORE: Debt consolidation pros and cons
Why are you facing a lawsuit?
When it comes to the various types of debt, unsecured debt is the hardest for creditors to collect.
Unsecured debts are not backed with any collateral. They are loans issued in good faith, and lenders hope borrowers will repay what they have borrowed. They include credit card bills, personal loans, medical bills and private student loan debt.
The most successful way for creditors and debt collectors to recoup unpaid unsecured debt is to take legal action. The primary goal is to get the court to order some form of wage garnishment so the debt collector will receive at least a partial payment.
Pro tip: If you’re worried about being sued over debt, you are not alone. There are plenty of others in the same boat. Check out this reddit thread for some first-hand experiences.
Have you actually received a court summons?
There is a difference between a debt collector threatening to take legal action and actually receiving a court summons.
If the debt collector threatens a lawsuit, request that they validate your debt in writing. If they cannot prove that the debt is legitimately yours, you can’t be sued. Also, find out whether the statute of limitations has expired on your debt.
If you’ve actually gotten a court summons, the situation becomes more complicated. Please consult with an attorney. If you can’t afford an attorney, look for one through a local legal aid group.
If you already have an attorney, give the court summons to your law firm. If you are working with a credit counselor or debt settlement company, inform them of the court summons. Do not skip the court date if you have received a court call.
Pro tip: If you get a court summons, DO NOT IGNORE IT or assume that your attorney, credit counselor or debt settlement company will take care of it. Contact them. If you fail to appear in court when scheduled, you could face repercussions including wage garnishment and being jailed for contempt of court.
8 ways to prevent a debt consolidation lawsuit
While a debt consolidation loan may not necessarily stop a lawsuit, there are ways to get out of it.
1. Pay off the full debt amount
This is the most obvious step you can take. If you find out the debt is accurately yours and you pay it off entirely, that will stop a lawsuit. If you decide to pay off a debt in a lump sum, ensure you get a receipt and discuss how it will be reported to the credit bureaus before making the payment.
However, repayment is likely not that simple. If you had the money to repay the debt in full, you probably wouldn’t be in a situation where you’re facing a lawsuit. There may be a few options you haven’t considered, though, like a home equity loan or line of credit or a debt consolidation loan.
2. Prove the debt is not yours
It’s also important to remember that you shouldn’t assume that debt is correct just because the company suing you includes it in a lawsuit. There is a limit to the length of time a creditor can file a debt collection claim against you.
Proving the debt is not yours is the best way to stop a lawsuit and get a debt collector off your back. Check your credit report and request a debt validation letter. You do not want to be on the hook for someone else’s debt.
The Fair Debt Collection Practices Act protects your rights, and one of those rights states that debt collectors must provide certain information about the debt that it says you owe. This includes:
- The name of the creditor.
- The amount of money you owe.
- Your right to dispute the debt within 30 days. The dispute can be filed by either mail or email.
- Your right to request the name and address of the original creditor if this information isn’t the same as the information for the current creditor (such as a debt collection agency).
If the debt collector doesn’t give you this information when they first reach out to you, they must send you a written notice including that information within five days of their initial contact with you.
3. Has the debt collector violated your rights?
Under the FDPCA, debt collectors can legally contact you:
- In person (but not at your workplace)
- By phone, mail, email, fax or telegram
- Via text message or social media
It’s likely a violation of the law if a debt collector calls you about a particular debt more than seven times within seven days or within seven days after talking with you by phone about a particular debt.
Other protections include:
- A debt collector isn’t allowed to harass you over the phone or through any other type of communication.
- If a debt collector is aware that an attorney is representing you about the debt, the debt collector generally must stop contacting you and must reach out to your attorney instead.
- A debt collector must stop contacting you if you ask in writing that they cut off all communication with you.
Telling a debt collector to stop contacting you doesn’t keep them from pursuing other methods to collect debt you owe, such as filing a lawsuit.
However, if your rights have been violated you can sue the debt collector in state court. In the lawsuit, you must be able to prove that your rights were violated. You may be able to collect up to $1,000 in statutory damages (and possibly more.)
4. Has the statute of limitations expired?
A statute of limitations restricts the amount of time that someone has to sue for damages they’ve suffered. Therefore, the statute of limitations on debt is the length of time a creditor or debt collector has to sue any borrower for failing to repay a loan. The laws are different in each state, so you’ll need to find out how many years a debt has to go unpaid before the statute of limitations expires.
Note that you still technically owe the debt, but debt collectors can no longer take you to court.
READ MORE: What is the statute of limitations on debt?
5. Hire a debt settlement company
If you are in a debt settlement program and are hit with a lawsuit, do not panic. Contact your debt settlement company and they should contact your creditor. Many debt settlement programs include legal protection or representation. You can try to settle with the debt collector out of court or settle with the debt collector in court. Once in court, you or your attorney can explain you are working on a debt settlement plan to pay off your creditors. Remember that debt settlement process will impact your credit score.
READ MORE: Debt settlement pros and cons
6. File for Chapter 7 bankruptcy
Filing bankruptcy should always be considered a last resort, but it could stop a lawsuit. All wage garnishments and debt collection payments halt when you file for bankruptcy. Bankruptcy creates an automatic stay that stops debt collectors’ collection efforts immediately. Whether it be Chapter 7 or Chapter 13 bankruptcy, seek legal advice from a bankruptcy attorney before filing. Bankruptcy can be tricky, and you will want the full scope of your financial situation and debt relief options before you make your final decision. Check with reputable attorneys and ask if they offer an initial free consultation before deciding on a bankruptcy attorney.
7. Enroll in a Debt Management Plan
If you are facing legal action, a nonprofit credit counseling agency may be willing to speak to the creditor bringing legal action against you. Your credit counselor can explain that you are entering a payment plan to make a monthly payment, resulting in the total debt being repaid. Hearing that you are in a repayment plan could entice your creditors not to pursue a lawsuit.
The credit counselor can also help you set up a Debt Management Plan. They will negotiate with your creditors to reduce your interest rates and set up a repayment plan. This is similar to debt settlement, except you’ll repay the total amount of your debts and also pay a monthly fee for plan administration. This normally ranges from $25 to $55 per month.
READ MORE: Complete guide to credit counseling
8. Consult a debt settlement attorney
A debt settlement attorney represents clients who want to remove their debts or at least pare them down. Like debt settlement companies, they negotiate settlements with creditors. The process helps people and companies avoid bankruptcy and other types of litigation. However, it’s worth noting that many debt settlement companies will also provide legal representation if it becomes necessary. A debt settlement attorney can be effective at preventing a lawsuit or dealing with a lawsuit that has already been filed.
READ MORE: Do you need a debt settlement attorney?
The Bottom Line
Being buried in debt is no fun, and having a lawsuit on top of it is unimaginable stress, but plenty of good debt relief options are available. Whichever road you take toward debt reduction and resolution, one benefit will likely be reducing stress and anxiety. Lifting the debt burden from your shoulders will leave you with more financial freedom, better health, and mental well-being.
No, debt consolidation and bankruptcy are two completely different concepts. The only common factor they have is that both can provide debt relief when you are overwhelmed with debt. Know the difference between the two so you can make the right choice when buried under a pile of bills.
Debt consolidation is a strategy where a borrower takes out a new loan and uses the proceeds to pay off their debt. It combines multiple debts into one single loan. Its purpose is to pay off your debt quickly, reduce the interest rate, lower your monthly payment, and streamline it. Before opting for debt consolidation, check your credit scores and crunch the numbers to see if this new loan will save you money. The better your credit scores, the better the interest rate the lender will give you.
Bankruptcy is a court proceeding in which a judge and court trustee examine the assets and liabilities of individuals, partnerships, and businesses whose debts have become so overwhelming they don’t believe they can pay them. It can release you from most debts, provide relief and allow you to make a fresh start.
Debt consolidation will not harm your credit score; bankruptcy will last 7-10 years.
You can consolidate your debt, even after it’s gone to collections.
Debt consolidation rolls all outstanding debts into one monthly payment, usually with a lower interest rate. Because you’re rolling multiple debts into a single loan, this is referred to as “consolidating” your debt. You take on a new, larger loan and use that money to pay off other existing loans with higher interest rates. It also streamlines multiple credit cards into one payment, making it harder to miss a payment or incur a late fee. Debt consolidation could be a good option for borrowers with many debts with high or variable annual percentage rates. If you can secure a low fixed rate, this new loan can save you a lot of money over the life of the loan.
Once your new loan is funded, you use the money to repay all debts currently in collections, which will stop collection efforts.
If you are facing repossession or foreclosure, debt consolidation may be able to help by helping you to catch up on missed payments and avoid defaulting on your loans. However, debt consolidation is not a guaranteed solution and using an unsecured loan to consolidate secured debt may not always be the smartest idea, particularly because interest rates for secured loans are typically considerably lower than interest rates for unsecured loans.
Repossession or foreclosure may still occur even if you are enrolled in a debt consolidation plan. It’s important to speak with a financial advisor or credit counselor to determine the best course of action.