When a debt is legitimately owed I have found that most people simply want to negotiate a settlement with the creditor and get it behind them. And while creditors will usually agree to settle a debt, if a court case has already been filed they will often ask for you to sign a “stipulated judgment” as part of the settlement.
In this article I will explain what a stipulated judgment is, why a creditor would want you to sign one, and discuss the pros and cons of entering into a stipulated judgment.
What is a Stipulated Judgment?
A stipulated judgment is a judgment where the both parties (you and the debt buyer) have agreed to the terms of the judgment and both signed it. By agreeing to a judgment you will forgo your right to a trial and agree to be bound by the terms of the stipulated judgment.
The typical agreement that accompanies a stipulated judgment usually states that you will agree to pay a monthly payment or a lump sum and so long as you keep up your end of the deal the debt buyer / creditor agrees not to file or execute on the stipulated judgment.
Usually the amount you are agreeing to pay is less than what the creditor is seeking in the lawsuit. However, the stipulated judgment is usually for the full amount. So you incentive to make good on the payments is that you will be paying less than what the creditor would get if they went to trial and won. The creditor is protected because if you default on your monthly payments then they have a judgment for the full amount without having to go through the hassle of a trial.
Why Would a Creditor Want You to Sign a Stipulated Judgment?
Creditors like stipulated judgments because they get what they want (money) and they are protected from you defaulting on your settlement agreement through the stipulated judgment – if you don’t make the payments they get a judgment for the full amount. A stipulated judgment takes a lot of the risk out of the collections process for the creditor.
“Pros” of Signing a Stipulated Judgment
Stipulated judgments make sense for consumers when the debt is legitimately owed to the creditor and there are no defenses or disputes that the creditor needs to raise at trial. It allows you to enter into a settlement with the creditor and negotiate the terms by which you will repay whatever amount is agreed to. A big plus of the stipulated judgment is that you retain some power over the situation whereas in a trial setting the final decision is going to be left to a judge.
“Cons” of Signing a Stipulated Judgment
The downside to a stipulated judgment is that if for whatever reason you can’t make the payments as agreed in the settlement you will end up with a judgment against you. You are also waiving your right to a trial.
Alternatives to Signing a Stipulated Judgment
If you believe you have strong defenses you can elect to take the case to trial. If you don’t have strong defenses or if you don’t feel comfortable taking your case to trial you can still attempt to negotiate a settlement without a stipulated judgment. This is an option particularly in cases where the amount in dispute is relatively low (under $10,000) and you are offering either a large lump sum or are able to pay the settlement off within a year or less.
Another option is bankruptcy. If you are facing a large judgment or if you have multiple creditors that you cannot pay bankruptcy may be a good option to deal with your debt problem once and for all.
If you are negotiating your own settlement and the creditor is asking for a stipulated judgment it never hurts to ask that the settlement be put in place without one. If the creditor insists make sure that you address the issue of interest. You will want the interest rate to be zero percent (0%).
Too often I meet with clients who negotiated their own settlements and the settlement states that the debt will continue to accrue interest at the contract rate – which in most cases is 20-30%! The result of this type of settlement is a payment plan that will never end.
Also, make sure that you include a term in your agreement that the creditor is not permitted to file the stipulated judgment with the court unless you default on your payments. Again, many times creditors will have you sign the stipulated judgment and then will file it with the court, and then once you make the final payment they will vacate it or file a notice that the judgment has been satisfied.
This is not enough! If they file the stipulated judgment with the court it will likely show up on your credit report and really is no better than if you had gone to trial and lost. The stipulated judgment is the creditor’s insurance policy – only to be cashed in (filed with the court) if you default.