What Are My Legal Rights After Debt Settlement?


When you’re in the process of settling a debt, it’s crucial to keep complete records and to take careful steps concerning how you pay off your settlement.

women reading papers

If you don’t take all the necessary precautions, or fail to make payments, creditors or collection agencies may continue to come after you for the full amount you had owed before you settled.

Sometimes a settlement may also fail to get recorded, and creditors or collection agencies might come after you again by accident. In these cases, although you’ve already paid, you’ll be required to prove that you no longer owe anything.

To avoid any unsavory consequences, it’s important to know what your legal recourse options you have after debt settlement.

Can creditors or collectors come after or sue me after I have settled?

Creditors and collection agencies can come after you or attempt to sue you after you have already settled, so it’s important to keep complete records of every agreement and payment.

The circumstances for this happening may vary, and sometimes it might be an accident. Usually, the law will be on your side, but you still need to be able to prove the settlement took place and that your payment or payments were accepted.

It’s also important to get them to put into writing that you have paid in full. Not only will this statement protect you if they try to collect again later, but you can use it to help rebuild your credit score. The law works differently from state to state, so make sure to inquire about these issues in your state if you’re in the process of settling a debt.

What is the law in different states?

Your rights and the rights of your creditor or collection agency vary depending on the state in which you live.

Some places make it nearly impossible for a collection agency to come after you after you’ve paid a settled amount, while others tend to favor the debt collector. Here is a quick rundown of how different states handle the post-settlement process.

Debtor-Friendly States

The following states benefit from some of the toughest enforcement of collection after debt settlement:

  • Arkansas
  • Colorado
  • Connecticut
  • Georgia
  • Kansas
  • Louisiana
  • Maine
  • Michigan
  • Nebraska
  • New Jersey
  • North Carolina
  • Oregon
  • Pennsylvania
  • Texas
  • Utah
  • Vermont
  • Virginia
  • Washington
  • Wyoming

In these states, it is illegal for a creditor to accept a settlement and then hire another company to collect the balance.

Creditor-Friendly States

Other states allow creditors to sue you even after cashing a check if they write either of the following phrases along with their signature on the check: “under protest” or “without prejudice.” It must be this exact phrasing to qualify for a lawsuit.

This process is applicable in the following states:

  • Alabama
  • Delaware
  • Massachusetts
  • Minnesota
  • Missouri
  • New Hampshire
  • New York
  • Ohio
  • Rhode Island
  • South Carolina
  • South Dakota
  • West Virginia
  • Wisconsin

A tricky place is California, where creditors are allowed to sue after debt settlement by crossing out any full payment language.

However, legislators also enacted a law to help debtors circumvent this process, which involves sending a letter with your settlement payment that includes a note explicitly stating that cashing the check equals agreement that the balance has been paid in full.

What can I do to prevent further collections after debt settlement?

If creditors or debt collectors have agreed to a settlement, there are a few things you can do to help prevent them from coming after you again. Most of this involves keeping accurate and complete records and carefully making your final payments; the way in which you make your final payments is also important.

Here are some things that you should and shouldn’t do:

  • Do — keep a record of all agreements and payments, including copies of every money order or cashier’s check you use to pay back your settled amount.
  • Do — make sure the creditor or collector issues any new terms of payment on official letterhead.
  • Do — use registered and certified mail for all correspondence and payments.
  • Do — make all your payments on time. Whether it’s a single lump sum payment or a new installment plan, you must make sure to make these payments or your agreement can fall through, erasing all the hard work that went into the settlement.
  • Don’t — reveal your bank or where you work. Even once a settlement has been reached, it’s important to protect your personal and financial information. If you’re asked for any of this information, write or reply “no comment.” You want to make sure that the creditors or debt collectors cannot still try to come after you, and that if they do, you haven’t made it very easy for them.
  • Don’t — use a personal check to pay for settlements. Using a personal check reveals information that you should never give to a creditor or collection agency. You want to protect your financial information as much as possible, so always pay with a money order or cashier’s check purchased from another bank, and always make a copy of it.

What are my rights after a debt settlement?

After a debt settlement, you retain the same rights under The Fair Debt Collection Practices Act. For instance, the settlement should be accurately and fully listed on your credit report. Additionally, the creditor or collection agency should follow the proper legal protocol for contacting you and pursuing the debt.

Pay careful attention to these steps, because if the collection agency is coming after you for a debt that has already been settled, they’re likely to use shady collection practices.

If you notice your credit report has been pulled by a creditor or collection agency, make sure they have a permissible purpose to do so. They may not, for example, pull your credit just to check on your current financial activity.

Can I declare bankruptcy after a debt settlement?

If you had a successful or a failed debt settlement and are now considering bankruptcy, there are usually certain rules or waiting periods that apply to your situation. Your best bet is to discuss the matter with an attorney in your state to find out the relevant process for both local and federal laws.

Lauren Ward
Meet the author

Lauren is a Crediful writer whose aim is to give readers the financial tools they need to reach their own goals in life. She has written on personal finance issues for over six years and holds a Bachelor's degree in Japanese from Georgetown University.