Rachel Hunter, J.D. | Article

Options for the Resolution of Debts - Part I

I frequently answer many questions from people who find themselves in debt and don’t know what to do. Whether their debt is current and about to become delinquent or those with a judgment that is already entered, the options are the same. Which one a debtor chooses depends on the debtor’s unique circumstances, the kinds of debt they have, their assets and their income. So learning about options is important and a debtor needs to know about all options in order to make an educated and informed choice about what to do. This guide is not intended to be a substitute for legal advice by a bankruptcy or consumer law attorney and any debtor should discuss these options in more detail with their attorney. It is nonetheless hoped that the information here will serve to provide the debtor with the knowledge to get started.

The options are: (1) do nothing; (2) if a lawsuit has been filed, litigate; (3) try to resolve the debt, either now or later; or (4) file bankruptcy. I will now discuss each of these options and provide a little guidance as to when the option might be utilized.


This is an option, primarily for elderly clients, but it can be for anyone with a fixed income, like Social Security or Social Security disability or with income which is exempt from garnishment. The individuals who choose this option should be at a stage of their lives where they will not need credit (like a car loan or a mortgage) and they should have few, if any, assets. The assets that they do own should be owned as a tenancy-by-the-entireties or joint-tenancy with right-of-survivorship (if land), only one of the spouses should be a debtor and the debt should be for a credit card or unsecured personal loan that is in the name of the debtor spouse. It does not work for things like medical debts, which are necessaries and for which the non-debtor spouse and/or the children might be deemed liable.

To provide an example, an elderly person lives in an apartment, has no car and has credit card debt. The person will not need to obtain credit. The person only gets income from Social Security. Such a person may be a candidate for simply doing nothing about his or her credit card or other unsecured loan debt.


Litigation attorneys will probably take issue with what I am about to suggest, but where lawsuits are brought in a timely fashion, i.e., before the statute of limitations has expired, and there is no question that the debt belongs to the debtor, and any required proof is attached, litigation does not make a whole lot of sense as the creditor is going to get a judgment against the debtor – it’s just a question of when. But here are some pros and cons:

First, the negatives of litigation:

(1) Cost – litigation costs money and if the debtor wishes to hire an attorney, it's going to cost money which generally is not recoverable by the debtor, absent some rule/statute that authorizes attorney fees.

(2) Even if the debtor decides to represent him or herself and save money, the debtor is responsible for drafting an answer pro se and timely filing it with the court. Depending on where the action is brought, there may or may not be discovery. If there is, the debtor is not only going to have to respond to discovery requests by the creditor, but the defendant is going to have to formulate his/her own discovery and send it to the creditor to answer. Discovery generally consists of interrogatories (written questions), requests for production of documents (if not already attached to the complaint) and requests for admissions. Other materials (like requests for disclosure which some states require) might also be necessary. If the creditor moves for summary judgment, then the debtor must respond to that as well. Failing to respond may well will result in the entry of judgment.

(3) There is no law which mandates that a creditor must settle a debt for less. Making a creditor respond to litigation and spend attorney fees only to have judgment entered may risk annoying the creditor to the point where they refuse to settle at all once judgment is entered.

(4) If the debtor files an answer and the case is heard in small claims or magistrate’s court, the debtor must attend or a default judgment will be entered. Obviously, if a motion is to be presented, the debtor must show up to respond or present the motion. Most debtors that I have encountered do not want to be in court at all, so this may present somewhat of a hurdle.

Now the benefits of litigation:

(1) Statute of limitations has expired: Raise the defense by timely filing an answer! If the statute has expired, in most states, if you do not file an answer with the court, then the statute of limitations defense may be waived. In such case, if you do not answer the complaint, then the creditor is going to get a judgment against you. For situations where you are only paying a lawyer to draft an answer raising the defense and then arguing a motion to dismiss, paying the lawyer usually costs far less than the amount of the debt and will be money well spent because you will ultimately avoid a judgment and get the lawsuit dismissed if you prevail.

(2) Some states require documentation to be attached to a complaint and some do not. Where documentation is required and is not attached to the complaint, it may make sense to hire a lawyer and raise the proper objections. Obviously, if the creditor can supply the information, this may only buy some time, but in cases where a debt is bought by a junk debt buyer who sues, this may become much more important. The more times debts are sold, the less likely it is that a debt buyer will have the documentation to be able to prove that the debtor owes a debt. Again, it will be well worth the money spent to get a lawyer and object and defend in such cases.

(3) Identity theft or fraud situations: Sadly, it is becoming more common that people are being sued either for debts created by their spouses/partners which they did not know about or which were created by others because of identity theft. If this happens to you, by all means, get a lawyer. You should not have to pay on a debt that it is not yours.

(4) Delay: In most states, wage garnishment is allowed. And there are other situations where a debtor may not have money to resolve the debt today, but may have the money later (either because of a tax refund, inheritance or some other transaction). In any of these cases, delay is important. Every month of delay of the judgment is another month in which the debtor can try to build up funds to hopefully resolve the debt.

(5) Leverage: By signaling to the creditor that litigation is going to be more costly and time-consuming than expected, the debtor can often use these circumstances to extract a better settlement, especially in situations where a junk debt buyer now owns the debt and has difficulty in establishing liability. The debtor can often use lack of proof by the junk debt buyer to obtain a lower settlement and thereby save extended costs in litigation.

(6) Counter-claims/cross-claims: if an original creditor is suing and a debtor has counter-claims, these generally should be raised in any lawsuit by the creditor. Why? Even if not required, the existence of the counter-claims may be useful in reducing the amount claimed by the creditor. An example of this may arise in cases where the debt collection law firm has violated the Fair Debt Collection Practices Act (FDCPA) in some way.

Some benefits to non-litigation:

(1) If the debtor has sufficient funds, there is no need to devote precious resources by hiring an attorney litigation. The funds can be put towards an immediate settlement of the debt or a payment arrangement if necessary.

(2) If the debtor lives in a non-wage garnishment state and is largely judgment proof (meaning the debtor has few assets that the creditor can seize or, with proper planning, any assets will be considered exempt and/or safe from seizure), then the entry of judgment may actually be a benefit to the debtor. Most credit cards carry a default interest rate of 29% or even higher. Every month that the debt is unpaid subjects the debtor to continuing interest and late fees. However, once judgment is entered, the legal rate of interest applies to all judgments and is relatively low (6% in PA or 8% in NC; in GA it can vary as per the contract, but the legal rate is 7%). While this may not be a big deal for smaller debts, on large accounts of $10,000 or $20,000, on which it will take a debtor longer to accrue funds, the savings can be important.

(3) Just less aggravation and stress for the debtor. For a civil suit, the debtor is not required to appear in court (at least prior to the entry of judgment – post-judgment supplemental proceedings are a different matter and beyond the scope of this article). The debtor will not be thrown in jail. And debts can be settled at any time, even after judgment, when the debtor has funds, not on the creditor’s timetable.

So, should you litigate? Bottom line, if you are the victim of identity theft or fraud, if the statute of limitations has expired, if you are expecting money in the future and want to delay judgment, if required documentation is not attached to the complaint, if a junk debt buyer is suing and does not offer very much to prove its your debt or if you any have counter- or cross-claims, then it may make sense to litigate. But you will only know if any of these circumstances apply by having the summons and complaint reviewed by an attorney.

Otherwise, if your assets are exempt from seizure, and if you live in one of the few non-wage garnishments states like PA or NC, then it may make sense to allow judgment to be entered and resolve the debt when the debtor is in a financial position to do so. So don’t feel that you have to answer a complaint. Think of the summons as an invitation to participate in the legal process, not a mandate.