Rising credit card balances and stubbornly high interest rates are putting more borrowers in difficult positions right now. And, the economic landscape certainly isn't helping either, considering that prices are rapidly rising as debt totals grow and more borrowers face job losses and other hurdles. In turn, borrowers are falling behind on payments, and when that happens, the repercussions typically start with collection calls and warning letters. But for many, there are also bigger concerns that come with finding yourself on the receiving end of collection calls: the possibility of being sued over the unpaid debt.

That concern isn't unfounded, either. Creditors and debt buyers have many tools at their disposal to collect what you owe, and given today's uncertain economy, they are becoming increasingly aggressive about pursuing unpaid balances in court, especially as payment delinquency rates continue to climb. Once legal action enters the picture, though, the financial consequences can escalate quickly, shifting from debt collector phone calls and texts to lawsuits, court costs, judgments, and, in some cases, wage garnishment and bank levies.

Still, a lawsuit doesn't always mean your options have disappeared. In many cases, borrowers can attempt to negotiate a settlement either before legal action begins or after papers have already been filed. But the timing can significantly affect the process, so it's important to know whether it's smarter to make an offer before or after a lawsuit is filed.

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Should you settle your debt before or after a lawsuit is filed?

In general, there is no universal answer to when a debt settlement offer makes the most sense. The right timing generally depends on how far behind you are, how much you owe, whether legal action appears imminent, and what your overall financial situation looks like. Here's what to know about both options:

What to know about settling debt before a lawsuit is filed

When an account first becomes seriously delinquent, typically after 90 to 120 days of nonpayment, creditors are generally more focused on recovering at least part of the balance than on pursuing legal action, at least not immediately. During this window, you may have more negotiating leverage because creditors typically want to avoid the cost and time involved with filing a lawsuit.

Settling before legal action takes place can also help you avoid additional expenses tied to court filings, attorney fees and post-judgment collection efforts. In some cases, it may also prevent a judgment from appearing in public court records, which can be a big benefit to those concerned about how the record of a lawsuit could impact background checks for their future job prospects or other opportunities.

Another advantage of trying to resolve the debt before a lawsuit is that settlement negotiations may feel less urgent and adversarial before attorneys become involved. You may have more time at this point to review your finances, compare repayment strategies and potentially work with a debt relief company that can help to negotiate more favorable terms.

That said, settling early isn't always easy. Creditors may refuse to settle or may not be willing to significantly reduce your balances if they believe there's still a good chance that they can collect the full amount. Borrowers who settle too quickly may also agree to terms they can't realistically afford, which can create additional problems.

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What to know about settling after a lawsuit is filed

Many borrowers assume that once a lawsuit is filed, a settlement is no longer possible, but that's generally not the case. Creditors may still be open to negotiating because lawsuits can be expensive, time-consuming and have uncertain outcomes. In fact, some creditors become more motivated to settle after filing a lawsuit because they want to avoid drawn-out court proceedings. You may also gain leverage if the creditor lacks sufficient documentation about the debt or if legal defenses exist.

However, settling debt after a lawsuit has started comes with much higher stakes. Court deadlines matter, and ignoring legal action — i.e., not responding to the lawsuit — can result in a default judgment. Once a judgment is entered, creditors may gain powerful collection tools, including the ability to pursue wage garnishment, bank account levies or even liens on property in some states.

Borrowers who wait too long to address the situation may also face added legal costs that increase the total amount owed. And because the situation becomes more urgent, they may feel pressured into settlement terms that strain their budget. So, the short answer is that if a lawsuit has already been filed, responding quickly is critical. Even if you intend to settle, failing to answer the lawsuit could eliminate important negotiating leverage.

The bottom line

Settling debt before a lawsuit is filed often provides more flexibility, lower costs and fewer legal risks — but a lawsuit filing against you doesn't automatically negate the room for negotiation. Creditors want to get paid, and that incentive exists whether you're in collections or in court. The worst thing you can do in either scenario is go silent. Respond, engage, and if you can't afford full payment, make an offer. A partial settlement is almost always better than a judgment, and a judgment, as painful as it is, is still not necessarily the final word.