Alabama Debt Collection Lawsuit Questions — Part Six — Settling The Lawsuit On Your Own
In this part of our continuing series, we discuss your “third option” which is to settle the debt collection lawsuit on your own.
Here are the previous parts of this series:
- Overview of what is the collection lawsuit
- What does it mean to be served
- Overview of your five options
- Option One — bankruptcy (rarely appropriate)
- Option Two — fighting the lawsuit on your own
Now let’s get into this option and it all starts with a reminder you must file your Answer to the lawsuit in time. Even if you are planning on settling the case.
IF I SETTLE THE LAWSUIT ON MY OWN…
“Do I still need to file an answer if I am settling a case?”
Well, what about if you want to settle the lawsuit on your own? You want to settle it, not fight it. You want to do it on your own and you do not want to hire a lawyer. Do you still need to file an answer if you’re settling your case?
Yes.
So here’s a trap a lot of people fall into.
Let’s say you are served on the first of the month, in small claims court. So how many days do you have?
You have 14 days to answer.
So you think, “You know what? I’m not going to fight this. I want to settle it.”
So you’re calling the lawyer. Maybe the lawyer’s a little slow getting back. Maybe he calls you back and you’re busy.
And before you know it, it’s the 20th of the month, and you’re still talking to him, still negotiating.
And all of a sudden you get a judgment in the mail, where they have filed and received a default judgment against you.
You go, “Wait a minute! We’ve been talking.”
See, it doesn’t matter.
You can talk all you want, but the clock is still running on your time to answer the lawsuit.
And so file an answer, file your response, even if you’re talking to them.
“How do I file an answer on my own when I want to settle?”
And so, this is similar to what we looked at in the last option, how do you file it?
Well, you fill out the form or you create your own form.
Here are the steps:
- Fill out the answer properly
- Take it to the clerk’s office
- File it before any default judgment is filed against you
- You keep two copies for yourself and you send one copy to the other lawyer.
So that’s how you do it. This is how you protect yourself from having a default judgment while you are trying to settle your case.
“Can I file an answer denying the claim and till talk to the collection lawyer about settling the collection lawsuit?”
And this is a very important question because a lot of people are confused by this. They say, “Can I file an answer denying the claim, denying the lawsuit, but yet still talk to the collection lawyer about settling the case? Or do I have to choose, one or the other?”
The answer is yes, you can file an answer denying the claim – so what we just talked about in the previous page – file that answer, and you can still talk to the lawyer.
People are often concerned that they are admitting that they owe the debt by talking to the collection lawyer.
No. The courts encourage people to talk. That’s confidential.
And so the fact that you’re considering paying them some money does not mean that you admit that you owe it. The fact they’re considering taking potentially less than what they sued you for does not mean they admit that it was a bogus lawsuit. The court wants everybody to talk if there’s interest in talking.
So yes, you can file your answer and still talk to the collection lawyer about settling the case.
“How do I settle a collection lawsuit on my own?”
So how do you settle the case on your own? Well, just in general terms, you talk to the collection lawyer, and you negotiate a settlement with them.
And when you get to the point where you agree to it and the collection lawyer agrees to it, now your case is settled.
But there are some points to consider that we’ll cover in the next few questions.
“Do I need anything in writing?”
Absolutely.
You must get the terms of the settlement in writing. That writing can be an email, but do not make the mistake of thinking you don’t need it in writing – you do need it in writing.
Here’s a simple but common example.
You’re sued for $5,000, you negotiate a $3,500 settlement with the collection lawyer, but you get nothing in writing and you send them the $3,500.
And then they still come after you for the other $1500.
They say, “Great, you owed $5,000, you paid $3,500, so you still owe $1,500.”
You go, “No, no, no. That was a settlement.”
And they respond, “No, that was just a partial payment.”
And the judge is looking between the two of you, going, “Well, do you have the settlement agreement in writing?”
You go, “No. I thought if we did it over the phone that was fine. They say the calls are recorded.”
And the collection lawyer says, “Well, we had a little glitch that day and all the recorded calls were deleted for that day.”
So protect yourself — put it in writing.
Now I’ll say this about most of the collection lawyers I know, these are honorable people. They are not going to lie. But sometimes people have a misunderstanding and there’s confusion over what was said.
Don’t take that risk.
Don’t put yourself in jeopardy.
Instead, get it in writing so it’s absolutely clear to everybody what the terms of the settlement are.
“What’s the difference in a lump sum settlement and a payment plan settlement?”
A lump sum is just money all at once. So go back to our example, you’re sued for $5,000. They say, “If you will pay us $3,500 in the next 30 days, the case is settled.”
Okay, that’s a lump sum.
But if you say, “You know, I don’t have that money,” or, “I don’t want to turn loose of that money all at once,” they’ll say, “Okay, well how about you pay $500 a month for 10 months.”
So that’s a payment plan.
Or $250 a month for 20 months. That’s a payment plan.
Typically in a payment plan, you’re going to pay the whole amount.
In a lump sum, you pay a discounted amount all at once and then the rest you do not have to pay.
“Why does the collection lawyer keep bringing up a ‘consent judgment’ to settle the collection lawsuit?”
Here’s something that we see quite a bit of. Especially in a payment plan settlement.
The collection lawyer will say, “Yeah, we can take $250 a month for the next 20 months, but we’re just going to need you to sign this little document. It’s just something called a consent judgment.”
Well, what they’re wanting you to do is sign this document and then they take that to a judge, and the judge enters a judgment against you.
So remember earlier we talked about a default judgment, this is a consent judgment.
So what is a default judgment? That’s where we default.
Well, what’s a consent judgment?
It’s where we consent, we agree to the judgment.
Somebody says, “Well, why in the world would I agree to a judgment?” That’s a great question.
There’s no good reason to agree to it in my opinion but if you are representing yourself you have to decide.
But here’s the argument from the collection lawyers. They say, “Well, you promised to pay us $250 a month for 20 months. How do we know you’re going to pay it? What if you stop paying? We want this consent judgment so we can start garnishing your wages, garnishing your bank account, or do a sheriff’s sale on your home. This is our leverage — our protection.”
And look, from their perspective, it makes perfect sense.
But from your perspective, that’s a real judgment.
So if you’re asked, “Do you have any judgments against you?”
You would have to say that you do.
It will show up on your credit report, at least if the credit bureau picks up on it. It’s a real judgment, just like a default judgment is a real judgment. My personal view is I don’t think you should ever agree to a consent judgment.
Obviously, if you represent yourself, which is what we’re talking about, you have to make that decision. But I think consent judgments are terrible and there are much better solutions to this. So if they say, “You have to agree to a consent judgment.”
Again, you decide what you want to do, but you may want to say, “No, I do not agree to that.”
“How does the collection lawsuit actually end when I settle?”
The case ends with a dismissal, and what I recommend you’re looking for is a dismissal with prejudice. Normally we think of prejudice as not a good thing.
But here prejudice is a good thing.
It means the case is over.
That’s what you’re looking for.
“What tax consequences can I face when I settle my case?”
If I settle my case, are there any tax consequences I can face?
The answer is yes.
Now typically, if you’re doing a monthly payment plan, you’re paying off the whole amount, there will not be any tax consequences because usually there’s nothing “forgiven.”
But if you do a lump sum – to go back to our example, $5,000 lawsuit and you settle for $3,500, that’s a lump sum – you should expect or assume the debt collector, the debt buyer, is going to report to the IRS that they forgave you the difference, $1,500.
Well, what does that mean? That typically means there is $1,500 of income that you now have to pay taxes on. Now, I’m not a tax attorney, I’m not giving you tax advice, you’ve got to figure this out on your own as you are representing yourself with this option.
I just want to alert you to this because people get this very nasty surprise. So they’re sued in February, and they settle – let’s make it bigger numbers – they’re sued for $10,000. They settle for $6,500, and then the following January they get a 1099 tax form from Midland Funding for $3,500, which is going to cost them quite a bit in taxes.
They’re going, “Wait a minute! I thought I was done with that.”
Well, you were done with the settlement, but not the tax consequences.
There are strategies to reduce or eliminate tax liability from forgiveness of debt that you will need to figure out by talking to your tax advisor.
So make sure you understand the tax consequences if you’re settling a case on your own.
“How does settling impact my credit reports?”
We’ll go back to our example we’ve been using. You’re sued for $5,000, Midland Funding’s on your credit report for $5,000 and you paid them $3,500.
Well, if you do that, once the case is over, once you’ve paid that money, then how much do you owe Midland Funding?
Zero.
Now a lot of times, we’ll see these debt buyers, they’ll put your current balance as $1,500. So you take $5,000 minus $3,500, and they go, “Yeah, you owe me $1,500.”
The response is “No, I owe you zero because I settled this with you. I paid this. We did a lump sum settlement and it’s over now.”
But understand, it will still be on your credit report, and you want to make sure it’s a zero balance and that it’s not reporting that you still owe more money than you do. Which again, if you settle it, zero balance.
When we find this or it does not get fixed, we typically sue the debt collector.
It’s a lot more complicated when you’re doing a payment plan.
When do they have to update that?
When do they have to lower the balance?
But just understand, settling can definitely have an impact on your credit reports, and sometimes when you settle, it has at least a temporary reduction in your credit score. Kind of bizarre, huh? But the idea is this is recent activity, and so just be aware, settling can definitely have an impact on your credit report.
What’s next?
In the next part, we will talk about the option of hiring a lawyer to fight the lawsuit for you.
Thank you for reading this and I hope these questions — and answers — are helpful to you.
Feel free to call us if you have a question about a collection lawsuit in Alabama — you can call us at 205-879-2447 or fill out our contact form and we’ll email or call you right back.
Look forward to talking to you soon!