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Being served with a debt collection lawsuit may be one of the most stressful financial situations you can face when behind on payments. These legal actions don’t come out of nowhere, though. They’re typically the end result of months or even years of missed payments and ignored collection notices. A lawsuit is simply an escalation of those debt collection attempts, albeit a serious one that can lead to wage garnishment, bank account levies and property liens if a judgment is issued against you.
Not all types of debts carry the same risk of legal action, however. Given the high cost and effort that goes into a lawsuit, most debt collectors make calculated decisions about which accounts to pursue through the courts. That decision is based on several factors, including the amount owed, the type of debt, state-specific regulations and their assessment of your ability to pay. So, understanding which debts are most likely to trigger lawsuits can be particularly useful if you owe money you can’t afford to pay.
Below, we’ll take a closer look at what types of debt are most likely to lead to lawsuits and what you can do to prevent one from happening to you.
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What types of debt will a debt collector sue over?
While the threat of a lawsuit is a common tactic debt collectors use to try and compel you to pay, the reality is that they don’t sue over every unpaid bill. Legal action costs money, so debt collectors typically pursue cases where the potential recovery justifies the expense. Here are the types of debt most likely to result in lawsuits:
Credit card debt: Credit card debt is one of the most commonly litigated forms of debt, especially when balances exceed $1,000. Credit card companies and their debt buyers have streamlined the lawsuit process, making it cost-effective to pursue even moderate balances. And, with average credit card interest rates now closing in on 23%, even modest credit card balances can balloon quickly, increasing the likelihood of litigation.
Medical debt: While hospitals and medical providers often try to avoid lawsuits, debt buyers who purchase delinquent medical accounts often turn to litigation.
Auto loan deficiencies: If your car is repossessed and sold for less than you owe on the loan, you’re responsible for the difference, which is known as a deficiency balance. Lenders frequently sue to recover these amounts, which can range from a few thousand to tens of thousands of dollars.
Personal loans and lines of credit: Banks and financial institutions actively pursue unpaid personal loans through legal channels — especially those with higher balances. Part of the reason is that these loans often contain contractual provisions that make litigation more straightforward for the lender.
Private student loans: Private student loan companies commonly use lawsuits to collect defaulted debt. And, most private student loan balances are high enough that these cases can have significant financial consequences.
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What types of debt are less likely to result in a lawsuit?
Certain types of debts are less likely to result in lawsuits (though it’s not impossible):
Utility bills: While utility companies may send delinquent accounts to collections, they less frequently resort to lawsuits unless the amounts are substantial or part of a pattern.
Small consumer debts: Accounts under $500 are less commonly litigated because the cost of legal action may approach or exceed the potential recovery.
Very old debts: Accounts approaching your state’s statute of limitations (typically three to six years, depending on the state and type of debt) may not be worth pursuing through the courts.
Federal student loans: The federal government has administrative collection powers (like tax refund interception and wage garnishment without court orders) that make lawsuits unnecessary in most cases.
How to avoid a debt-related lawsuit
Preventing a debt collection lawsuit is almost always easier than defending against one. If you want to avoid this outcome, it may benefit you to take these proactive steps:
- Communicate with creditors: Don’t ignore collection notices. Contact creditors when you first experience financial difficulty to discuss hardship programs, payment plans or settlements. Many creditors prefer these types of negotiated solutions to expensive litigation.
- Prioritize high-risk debts: When resources are limited, focus on paying debts most likely to result in lawsuits — things like larger credit card balances, medical bills and secured loans with potential deficiency balances.
- Document everything: Keep records of all communications with creditors and collection agencies, including dates, names and summaries of conversations. If you reach an agreement, get it in writing before making any payments.
- Consider debt settlement: For accounts you can’t pay in full, offering a lump-sum settlement of 30% to 50% of the balance could result in a successful compromise, especially if the debt has been delinquent for some time.
- Seek credit counseling: Credit counseling agencies can help negotiate with creditors and develop manageable repayment plans, often with reduced interest rates and waived fees.
- Consider bankruptcy protection: For overwhelming debt, bankruptcy may provide a clean slate and immediately stop collection lawsuits through an automatic stay.
The bottom line
Debt collection lawsuits typically target larger balances where the potential recovery justifies the legal expense, and, in general, credit cards, medical bills, loan deficiencies and private student loans pose the highest risk for litigation. Understanding this hierarchy can help you prioritize payments when finances are tight.
The best defense against a debt collection lawsuit is prevention, though. Open communication with creditors, documented payment arrangements and strategic settlements can often prevent legal action. If you’re struggling with multiple debts, seeking professional guidance from a debt relief expert may also provide valuable options you haven’t considered.
