Settling with the Debt Collector

I mention “settling” with the debt collector various times throughout my videos and other materials, but such a simple term and concept is much richer than it seems. Should you settle with the debt collector? When? And for what terms?

I often talk about “settling” with the debt collector as if it means "defeat," but actually it can mean lots of things, even victory.

A little background to “set the table” may help.

Settlement as Defeat

When people first receive notice of suit by a debt collector, their reaction is very often panic. Many, and perhaps even most defendants call up the debt collector and try to “settle” the suit at that point. They usually offer all, or nearly all of the money demanded by the suit in exchange for time in which to make the payments (“terms”). To trade hard cash for soft terms is not an effective bargain, and in reality this is a fear-driven attempt to delay disaster.

Right?

Such a settlement is basically a defeat. The debt collector emerges with all the judgment it hoped to get, plus an actual agreement by you to pay (and often information vital to its collection efforts). If you miss a payment, it can and will initiate garnishment the very next day, and so in reality the consumer's attempt to delay collection has actually hastened it. Plus there is often a judgment entered against the consumer. All the damage, and then some, and none of the benefits. It's just a disaster to the consumer. There's no need for you to do that. With a little help and some effort, you can often beat the debt collectors and save hundreds or thousands of dollars.

Settlement as Compromise

If you fight even a little bit you change the terms of the agreement dramatically. In the first place, by the time you have answered and begun to fight, two months will have passed, and the debt collector will be looking at the prospect of spending time and money over the course of the next several months to try to win the case. And it may lose

The further into the litigation you go, the more you develop a sense of what the debt collector can or cannot prove. If you become convinced that the debt collector cannot win its case, and specially if you have a counterclaim, then you will want to consider the next section, “settlement as victory.” But if you are left uncertain, or even if it looks pretty clear that the debt collector will win, you are still in a position to argue for a significant reduction of the dollar demand of the suit plus terms. You should do this, and you will probably accomplish both goals.

Why would they settle like that if they know they can win? Because you have demonstrated that you will fight. It will cost them money to fight you, and they never really know for sure if they can actually get you to pay them in the end even if they win. Collecting is hard, and in these cases the debt collector rarely collects much of their judgment I'm sure. When you fight, you present them the chance that they will absolutely lose and the certainty that they will spend money and time they could spend more profitably suing someone else. They'll almost always settle as an actual compromise as a way to get out of this difficulty. You have something real to offer, and you can demand something real in return. No matter how bad it looks for you.

Settlement as Victory

Of course, if you show that the debt collector probably, or certainly, cannot win at trial, and specially if you have a counterclaim which prevents the debt collector from simply dismissing your case “without prejudice,” then you will be in the position to “settle” your case as a victory.
If you can beat them, you magnify their concerns I mentioned above and also present them with the possibility of owing you money. If you have no counterclaim, they'll often simply dismiss the case on the day of trial—or the day before. That leaves you anxious for longer than necessary and leaves open the possibility of them filing suit again. If you have a counterclaim, they can't do that, and you can force them to dismiss “with prejudice,” which means that the debt is dead and gone. No more credit report damage, no more harassment.

If you've got them seriously dead to rights on both their claim and yours, you may be able to make them pay you something. Most often, though, your settlement will be “mutual dismissal with prejudice.” That is, both sides agree to drop the suit forever. I call that sort of a settlement a victory for the consumer.

Agreeing to Discuss Settlement

It should be clear from this discussion that you never need to tell a judge you would “never settle.” Instead, you can very cheerfully accept any invitation to discuss settlement at any time on the terms that would be acceptable to you. The further along in the litigation you are, the more favorable those terms are likely to be, and so it generally makes sense to fight for a while at the beginning of the suit.