Editorial Policy

What should you do when a creditor threatens to sue?

Erica Sandberg

August 19, 2014

QHi Erica,

I owe $4,000 in medical bills that I can't afford to pay back, and the collection agency is threatening to sue me. This dates back a couple of years. I read there's a statute of limitations on suing for this kind of thing. Would it be a good idea to hold out until the statute of limitations runs out? –Janice

ADear Janice,

Yes, a creditor, whether the original lender or the collection agency to which it sold the debt, only has a certain number of years in which to sue you for unpaid debt. This statute of limitations, however, varies greatly depending on where you live. Before you make any decisions, check out how long it may be for you.Ask Erica

Sometimes, collection agencies imply that they will sue for a balance due, but in reality they can't, because the statute has already run. If this is the case for you, you're safe. The worst that can happen is the debt might continue to be listed on your consumer credit reports for the full seven years that it is allowed to appear. That time period starts at the charge-off or last payment date.

On the other hand, if the agency that is holding the debt is threatening a lawsuit that it's allowed to file because it has time to take that action, sit up and pay attention.  As stipulated by the Fair Debt Collection Practices Act, collectors can only say they will sue when they truly are intending to do so. Typically, they will give you one last chance to pay up before taking that action.

You do not want to be sued. Trust me on this. If you owe the money, you will probably lose the case and be responsible for much more than that already large bill. Court costs and other fees will be applied, and a post-judgment interest rate will cause finance charges to accrue until it's paid. Worse, the judgment creditor may be able to garnish your wages, attach a lien on your property and/or claim some of your assets to satisfy the debt. Your credit file will also be affected, as the judgment will appear in the public records section of the report.

The only time I recommend that people ignore debts that are still within the statute of limitations is when they haven't heard from the creditor and do not have the funds to make good on them. In such scenarios, they may want to let sleeping dogs lie, since if they wake them they may get bitten with aggressive collection activity. Calls and letters would begin again. Additionally, if you enter into a new payment schedule, you could restart the statute of limitations clock.

Since money is tight, and you don't have all the funds to pay the entire balance, consider a debt settlement. If you can, gather around half of the amount due, then contact the collector and ask that they accept it as a complete and final payment. They may attempt to negotiate, so anticipate a bit of back and forth — and be willing to bend some. But because the account is a couple of years old and they may have already given up on you, it may feel like a windfall to them, so they'll be happy to take the offer. Just be sure to get it in writing.

The only downside for you would be the possible tax consequence. The forgiven sum could be perceived as taxable income, so you may receive a higher than anticipated tax bill. Other than that, your credit reports will benefit because the debt will show as satisfied, and you can finally relax. The entire matter will be closed.

Got a question for Erica? Send her an email.