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Debt Collectors Want to Settle Outside Court

Dena Standley | April 23, 2024

Dena Standley
Legal Expert, Paralegal
Dena Standley, BA

Dena Standley is a seasoned paralegal with more than 20 years of experience in legal research and writing, having received a certification as a Legal Assistant/Paralegal from Southern Technical College.

Edited by Hannah Locklear

Hannah Locklear
Editor at SoloSuit
Hannah Locklear, BA

Hannah Locklear is SoloSuit’s Marketing and Impact Manager. With an educational background in Linguistics, Spanish, and International Development from Brigham Young University, Hannah has also worked as a legal support specialist for several years.

Summary: Debt collectors may prefer settling outside court because lawsuits are lengthy and costly, and outcomes are not guaranteed. Find out how SoloSuit can help you take advantage of this fact.

Debt settlement presents many advantages to consumers. If successful, the debtor pays less than they owe, avoids legal costs and court fees, and saves time. Consumers who request settlement can stop collection calls, start rebuilding their credit, and avoid having to attend a court trial.

However, because many think creditors and third-party debt collectors prefer lawsuits, they feel they have no choice.

You may be surprised to learn that, just like you, most creditors and debt collectors prefer to settle out of court. This article explores the benefits of settling defaulted accounts and the best ways to achieve a fair settlement.

Why do some debt collectors prefer to settle outside court?

Settling defaulted accounts with consumers means that a creditor or debt collector accepts less than the original amount of the debt, legal fees, and interest. Many debt collectors prefer this option instead of filing a lawsuit to recover the total amount. The following are some factors that may work in your favor.

  • The court process is expensive. Debt collectors spend a lot of money on court and attorney fees. They may seek reimbursement for these expenses from the defendant, but that is not always guaranteed.
  • Going to court takes time. Court trial can be tedious and time-consuming. The plaintiff must file the lawsuit, serve the Summons, wait for the court to set a hearing date, and gather evidence to support the case.
  • The outcome is uncertain. No matter how well they prepare for their lawsuits, creditors know they cannot manipulate the court's decision.
  • Gathering evidence is a lot of work. Some debts have changed hands several times, often making it harder to collect a debt or file a successful lawsuit. Also, some creditors have too many delinquent accounts and prefer to settle as many as possible.
  • Collecting a judgment may take too much effort. Even if the debt collector wins the lawsuit, they may have to wait a long time for payment if the consumer has no assets or cash to pay the debt in full. Accepting a lower offer may work in their favor.
  • They may save on taxes. Creditors will report the amount they forgave to the IRS as bad debt. Sometimes, they can save as much as a third of the canceled debt. They may be willing to accept a settlement offer if you can pay them more than that amount.

If you have past-due unsecured debts for which a collector is threatening to sue, or has already filed a lawsuit or legal dispute, consider negotiating a settlement. Let’s discuss how to approach creditors for debt settlement negotiations.

Settle your debt outside of court.

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How do I ask a debt collector for settlement?

Do not ignore the lawsuit if you received a Summons and a Complaint document. Ensure you respond by filing an Answer within your state's deadline. You may have just a couple of weeks before it is too late. If the judge finds you ignored a Summons, you cannot defend yourself. The court will likely rule in favor of the plaintiff.

SoloSuit can file your Answer for you. After you enter your information and respond to a few questions, your document will be ready in minutes, and an attorney will review and approve the document before filing.

After responding, you can contact your creditor or debt collector directly to initiate negotiations. Keeping a written trail of communication is beneficial for later reference.

Example: Debt settlement is like John walking to his creditor and saying, "Look, I know I owe you this much money, but the way things are going for me financially, I will never afford to pay it off. The amount will only keep growing if this account stays open. Please accept this and close the account. I understand it is less than I owe, but it is all I have." John has the right idea. Now, all he needs to do is put it down on paper in a formal letter and be armed with negotiation skills.


Some consumers have used debt settlement companies to negotiate on their behalf. However, some of these companies charge a lot of money. If you cannot afford an expensive mediator, you can still go it alone and succeed. SoloSettle is an online platform that allows you to make offers, negotiate, and finalize payments before your court trial.

Make a reasonable debt settlement offer

All you need to do is make a reasonable settlement offer and explain why you cannot afford to pay the total amount. A 25% or 30% settlement can work, although some creditors will insist on a higher amount. For debts sold off to debt collectors, settlement amounts can be lower as these companies buy delinquent accounts for a fraction of their value. Note that the settlement process is different for everyone, and likewise, so is the best offer amount.

Most lenders will accept your request if you offer a lump-sum payment. Setting up a new repayment plan will cost more than a one-time settlement because it carries more risk for the lender, as there is the possibility that debtors might default again.

If you plan to settle, draft a debt settlement agreement that captures every aspect of the transaction, preserves evidence, and binds both parties to keep their word.

Read More: What is a Debt Settlement Agreement?

Debt settlement will affect your credit score and taxes

Remember that debt settlement may negatively impact your credit score for a while—typically seven years. It may also have tax implications, with the IRS requiring you to pay tax on the forgiven amount if it exceeds $600. Your lender will file form 1099-C to report the debt cancellation, and the amount canceled may be considered income on which you will be taxed.

While you may want to fight legal disputes to the end and hopefully pay nothing, remember that debt collectors may be more willing to settle than you think. It only takes an initial offer to find out.

Make an offer to settle your debt.

To learn more about how to settle a debt, check out the following video of an interview with attorney John Skiba who shares tips and tricks on negotiating with debt collectors for debt settlement.

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