Sure, debt can be quite the adventure, but there’s no reason the ride on which it takes you has to include a lawsuit. While it seems like you can get sued for just about anything these days, the threat of a lawsuit over money owed is very real. In fact, it’s protocol for credit card companies and banks to sue consumers who have defaulted on their contracts and still owe over $5,000. Obviously, your goal should be to not let things get that far, but what options do you have when you can’t make monthly minimum payments and both your debt and the past-due notices from creditors just keep piling up?
Statute of Limitations for Debt
The first thing you have to understand is that debt is relevant under the law for a certain period of time, as the statute of limitations for written contracts applies to both credit card and loan agreements. This statute varies in length by state from 3 to 15 years and resets every time you make a payment, but before you get any wild ideas and decide to wait out the statute of limitations, make sure you have all the facts.
The statute of limitations for written contracts is important because once it expires, your debt becomes time-barred, which means you cannot lose a lawsuit as long as you make the age of your debt clear to the courts. It also alerts you to the fact that before that time comes you are extremely vulnerable to any suit your creditors decide to file. Unfortunately, just as making a payment toward your debt resets the statute of limitations, a simple written acknowledgement of your debt or promise to pay could also reset the time frame during which you are vulnerable to a lawsuit, depending on your state. In general, your creditors’ willingness to sue you depends on how much you owe and their estimation of your ability to make payments. Therefore, in most cases, your best bet is to take the statute of limitations out of the equation entirely.
Strike a Deal
Your goal is to reach a mutually beneficial agreement with whoever controls your debt, allowing you to comfortably pay down what you owe without the threat of legal action. Such agreements are usually classified as debt management or debt settlement plans.
Debt Management: This involves working with your creditors to set up an affordable payment plan, which will both forgive interest and fees and provide a time table for becoming debt free. It is absolutely essential that you not agree to payments you cannot make comfortably because if you fail to abide by the terms of an adjusted agreement, your creditors won’t honor their side of the deal either and all bets will be off.
Your approach in reaching this type of agreement should therefore be to make a budget, in which you cut all non-essential spending from your life, determine the monthly debt payments you can afford, and propose it to your creditors. If they’re satisfied with your offer, they’ll accept it. If not, you won’t be able to afford payments that will satisfy them anyway. Just make sure not to make any payments outside the bounds of a formal agreement in the hopes that it will garner the favor of your creditors. This will only reset the statute of limitations clock.
Debt Settlement: If you can afford to pay down a sizeable portion of your debt at one time, your creditors might agree to forgive the remaining amount as well as interest and fees. The benefit of this strategy is that it gets you out of debt quickly and at much less of a cost. The downside is that most people with serious debt cannot afford large lump-sum payments. If you can somehow swing it, however, remember that forgiven debt is often taxable, so you might want to consult a tax specialist in order to avoid an unexpected bill from the IRS.
Bankruptcy is a taboo subject for most people and for good reason; bankruptcy significantly damages your credit, and information about bankruptcy remains on your major credit reports for 7-10 years, depending on the type. However, it does bring your debt to manageable levels, and if you are unable to come to an agreement with your creditors and fear potential lawsuits, it might be your best move. It doesn’t hurt to have information anyway, so find a bankruptcy attorney that offers free consultations, and see what he or she has to say.
Overall, while debt can be overbearing, you always have options. You simply need to familiarize yourself with them and develop a plan of attack. Once you implement your strategy and free yourself from debt’s grasp, set your sights on making lifestyle changes in order to avoid repeating your mistakes as well as rebuilding your credit so that you’ll be able to one day qualify for a low interest loan, be able to finance a home or car purchase, or even land jobs which require personal financial information as part of the application process.
This article was written by Odysseas Papadimitriou, CEO of Card Hub, a leading online credit card comparison marketplace.
Dr. Jason Cabler (@DrCabler) says
Of course, the best way is to avoid debt in the first place. If you are in debt then whatever you do don’t bury your head in the sand until it gets really bad and collection calls or a lawsuit happens.
You CAN get out of debt if you have a plan, and its not hard to do, just takes some commitment. I teach this to people all the time in my Celebrating Financial Freedom home study course.
Kevin @ Debteye says
The worst thing you can do is ignore a summons, in that case, the creditor will automatically have a default judgment against you. Most of the time, you can call your creditor within the 30 days and work out a deal. You’d be surprised at what kind of payment plans they can put you on. Some will even get you better payments than most credit counselors can.
Settlements can be a long shot since most people don’t have the money upfront. However, some creditors will allow you to break down the payments within a 3 month time frame.