What happens if you're sued while enrolled in a debt forgiveness program?
If you've ever faced a substantial amount of credit card debt, you know how difficult it can be to get ahead of it, even in a debt-friendly economy. But today's economic landscape is hardly friendly to those with high-rate debt. After all, the average credit card interest rate is now sitting above 22%, and credit card balances are also rising rapidly as more borrowers find themselves struggling to cover the rising costs of groceries, gas and housing. In turn, carrying credit card debt from month to month is a particularly expensive proposition right now — especially if you're facing an unexpected financial hardship.
If you're struggling with credit card debt in this landscape, the idea of enrolling in a debt forgiveness program can seem like an appealing option. After all, these programs, also known as debt settlement programs, can help you resolve your high-rate balances for a smaller amount. Borrowers who enroll in these programs typically settle their balances for 30% and 50% less than they owe on average, making it easier to pay off what's owed. But reaching those settlements isn't instantaneous, and a lot can happen while the process is underway.
In fact, one of the more serious complications can occur if a creditor decides to take legal action before a settlement is reached. So, what exactly happens if you're sued by a creditor while you're enrolled in a debt forgiveness program? That's what we'll examine below.
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What happens if you're sued while enrolled in a debt forgiveness program?
Being enrolled in a debt forgiveness program generally won't stop a creditor or debt collector from suing you over an unpaid balance. That's because debt forgiveness is a negotiation process, not a form of legal protection from debt collection. Until a settlement agreement is reached and the agreed-upon amount is paid, the creditor can typically continue trying to collect the debt through any legal means, including through a lawsuit.
The way debt forgiveness works can also create a window in which that legal action is possible. During this process, borrowers typically set aside money each month that will eventually be used to fund settlement offers. It can take several months or longer to accumulate enough to begin resolving their enrolled accounts. In the meantime, creditors aren't required to participate in the program or wait for a settlement offer. Interest and fees may also continue to accrue on the unpaid balances.
So, if a creditor files a lawsuit against you during that period, your enrollment doesn't put the case on hold. You'll still need to respond according to the rules and deadlines outlined in the court documents, even if your debt relief company is already negotiating with that creditor. And while some debt forgiveness companies may offer support or guidance when borrowers are sued over an enrolled account, you shouldn't assume the debt relief company will respond to the lawsuit or represent you in court.
Ignoring the case can also have serious consequences. If you don't respond by the required deadline, the creditor may be able to obtain a default judgment against you. What happens after that depends partly on state law, but a judgment can potentially give the creditor additional ways to collect, such as garnishing eligible wages, levying funds from a bank account or placing a lien on certain property.
A lawsuit doesn't necessarily bring the debt forgiveness process to an end, though. Settlement negotiations may still continue while the case is pending, and in some situations, reaching an agreement could resolve the debt before the creditor obtains a judgment. But once a lawsuit has been filed, the timeline and negotiating dynamics may change.
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What should you do if you're sued during the debt forgiveness process?
Facing a lawsuit while you're already trying to resolve your debt can add another layer of financial pressure to the mix, but taking action quickly can help you understand and capitalize on your options.
Start by notifying your debt relief company of the issue. Provide the company with copies of the summons, complaint and any other court documents you've received. During that process, ask whether the creditor is already being negotiated with, how much you've accumulated toward a potential settlement and whether the lawsuit changes the strategy for that particular debt.
You may also want to talk to a consumer law attorney, especially if you're unsure whether the debt is valid, the amount is correct or the debt collector has the legal right to sue you. An attorney can also explain the rules that apply in your state and help you determine how to respond to the lawsuit.
It can also make sense to review your overall debt relief plan at this point. If you have several enrolled debts and one creditor has filed suit, find out where that account falls in the settlement timeline and whether the money you've saved is sufficient to make a realistic offer. You should also ask how using those funds for one settlement could affect negotiations on your other accounts.
And if multiple creditors are suing, your balances are continuing to grow or you don't have enough money to fund reasonable settlement offers, it may be worth comparing your current debt relief strategy with other options. That could include credit counseling or, for borrowers facing severe financial hardship, consulting a bankruptcy attorney about whether filing for bankruptcy makes more sense.
The bottom line
Getting sued while you're enrolled in a debt forgiveness program can be alarming, but it doesn't automatically end the settlement process. The bigger issue is that enrollment generally won't stop the lawsuit on its own, so ignoring the court documents while waiting for your debt relief company to negotiate could make the situation worse. If you're served, notify the debt relief company promptly, determine what assistance it can provide and consider getting legal advice about your response. Acting quickly may give you more options for addressing the lawsuit while working toward resolving the underlying debt.
