Woman Asking Question What if I Miss a Settlement Payment?

Summary: Negotiating a debt settlement is a major milestone, but your problem isn't really gone until you've made your last payment. What happens if you miss one? The settlement is void. This means that the debt collector can pursue you for the full amount of the debt (not the negotiated settlement amount), minus anything you've paid toward it. If you're being sued or need to renegotiate, Solo is here to help.

Have you just settled your debt? If so, you're probably breathing a sigh of relief. But don't relax just yet. To finalize the debt, you must pay your settlement in full. Most of the time, this means paying a lump sum, but some creditors will allow you to settle with a payment plan.

Your settlement agreement is a binding legal contract between you and the debt collector. This means that if you fail to pay it as agreed, the debt collector can legally pursue you for what you owe.

Even so, there may still be time to protect your financial future. We'll explore the answer to a question many of our customers have: "What if I miss a settlement payment?"

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How do debt settlements work?

Many people who owe debts that they can't pay end up settling. Debt settlement is when you and a debt collector or creditor agree on an amount that is lower than what you owe. Once you pay that amount, the debt is considered resolved.

For instance, suppose that you owe $5,000 but can't afford to pay it. The debt collector doesn't want to waste any more time pursuing you for the full amount, so they may agree to accept $3,000.

Most settlements involve lump-sum payments. However, some debt collectors and creditors may allow you to pay your settlement in monthly installments.

Before you pay anything, get a copy of the agreement in writing. Most debt collectors have standard settlement agreements that include the following:

The amount of the settlement.
A statement saying the creditor won't pursue you for the remainder of the debt.
How the settlement will be paid (lump sum or installments).
What happens if you miss a payment.
What happens if you default on the agreement.
How the account will be reported to credit bureaus.

Many settlement agreements stipulate that if you default, the creditor can sue you or have a judgment entered against you for the full amount of the debt. Read your settlement agreement carefully!

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What if I miss a settlement payment?

A debt settlement agreement isn't just a piece of paper. It's a legal contract between you and the debt collector. If you default on your settlement agreement, you've breached that contract.

When that happens, the contract is void. This means that the debt collector can pursue you for the full amount of the debt (not the negotiated settlement amount), minus anything you've paid toward it.

The collector might need to file a lawsuit to do so, but many debt settlements include a clause that says if you default, the collector can get a court judgment against you for the following:

The full amount of the original debt (minus any payments you've made).
Interest.
Court costs.
Legal fees.

If your settlement agreement doesn't have a judgment clause, the collector may file a debt lawsuit. It's critically important to file an Answer. If you don't, the collector will likely obtain a default judgment against you.

A default judgment means that the debt collector automatically wins the lawsuit, but that's not all. When a debt collector wins a suit, they gain the right to garnish your wages, put a lien on your home, seize money from your bank account and take other aggressive collection actions.

Federal law limits the amount of your wages a debt collector or creditor may garnish to the lesser of these two (15 U.S. Code § 1673):

25% of your disposable earnings each week.
The amount of your weekly disposable earnings that exceeds 30 times the federal minimum hourly wage.

Some states impose further limits. Even if you can afford the garnishment, having a court judgment against you can seriously damage your credit. The debt collector must also set up the garnishment with your employer, and it can be embarrassing to have your employer know about your financial situation.

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Act fast if you miss a settlement payment

If you've missed a settlement payment, you must act quickly. Taking these steps as soon as possible may reduce your risk of facing further legal action.

Check your debt settlement agreement

Most debt settlement agreements stipulate that if you miss a payment, the debt collector must give you written notice and an opportunity to cure.

An "opportunity to cure" is a chance to remedy the situation to avoid further legal action. In non-legal speak, it means that if you miss a payment, the collector must send you a notice and give you a chance to make your payment before getting a judgment against you.

To see how this works when you default on a settlement agreement, let's consider an example.

Example: A year ago, Stephanie was sued for $3,000. After some negotiation, she agreed to settle the debt for $1,500. Her debt settlement agreement says she must pay $300 per month for five months. In the third month, money is tight, and she doesn't send in her payment. The collector mails her a letter saying she has 10 days to pay before a judgment is entered against her. Stephanie makes the payment immediately. After just two more months, Stephanie can move on and begin to rebuild her credit.

Contact the debt collector or creditor

Any time you're struggling to make payments or think you may miss one, it's in your best interests to be proactive.

Many people panic and freeze when they can't pay, but this is the worst thing you can do. Instead, reach out and explain the situation. Debt collectors and creditors have a reputation for being scary, but if you make it clear that you're doing your best to pay, they're more likely to want to work with you. In fact, many law firms are known to offer settlement options to resolve debt issues with consumers.

Depending on your situation, you might ask for temporary forbearance (a pause on payments until you improve your financial situation) or just a few more days to get the money together. If you've lost your job or taken a pay cut, you can ask about changing the amount of your monthly payment.

Ask about partial payments

If you can't make the full payment but you have some money you can put toward it, ask the debt collector if they will accept a partial payment to help you avoid default. This could buy you a little time to gather the funds you need for a full payment.

Key takeaways: What if I miss a settlement payment?

If you have a debt settlement agreement, take it seriously. Missing a payment could end up costing you far more than the value of your settlement. Here are a few things to keep in mind:

If you miss a settlement payment, it can void your debt settlement agreement.
You may have a chance to catch up on payments before the agreement is voided.
The debt collector could get a court judgment against you if you default.
That judgment could include the original value of the debt, along with interest, court costs and legal fees.
If you miss a payment or think you might miss one, reach out to the debt collector as soon as possible to discuss your options.

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FAQ

Do I still have to pay the debt if the debt collector violates the law?

Yes. The Fair Debt Collection Practices Act (FDCPA) (15 U.S. Code § 1692) establishes clear rules that debt collectors must follow. If the debt collector harasses you, fails to validate the debt or otherwise breaks the law, you have legal recourse.

If you file an FDCPA lawsuit and prove there was a violation, you could be entitled to $1,000 in statutory damages, along with any actual damages you faced and legal fees. However, even winning a lawsuit doesn't negate the debt you owe.

Can I put settlement payments on autopay?

Autopay might seem like an easy way to stay on track. Unfortunately, though, many collectors don't have the ability to automate payments.

Some debt collectors are more tech-forward and have online portals where you can view your account information. Depending on the collector, the portal might allow you to set up autopay.

How long does debt settlement impact your credit?

Accurate negative items on your credit report may remain there for up to seven years (15 U.S. Code § 1679c). Settling your debt has a negative impact on your credit, but it makes less of a negative impact than failing to pay anything. Additionally, its effect on your credit fades over the course of seven years.

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What if I Miss a Settlement Payment?