Collecting a Debt When Your Client Offers to Settle But Does Not Pay

Photo of a stack of money to represent when a client offers to settle but does not payYou completed your end of the deal but when it came time to pay your customer did not. After repeated invoicing, the customer finally offers to settle the balance due in writing but does not pay. Now that you are enforcing your right to collect and pursuing “legal” options, the debtor has changed their tune. Your non-paying client is now defending the debt collection case you brought against them. The debtor has also included sham counterclaims claiming the services or goods were defective.

How is this possible given their previous offer to settle? Isn’t the mere fact that they offered to pay proof they owe the money? It depends.

Understanding What Is Admissible in Court

New York state courts have a strict rule that forbids parties from including some references contained in settlement negotiations that prove the customer is liable for the debt. A written statement offering a settlement is not “admissible” as evidence. Therefore, it likely won’t help your case if your client offers to settle but does not pay.

New York’s CPLR, Section 4547: “compromise and offers to compromise” makes it clear that a direct statement from your customer merely offering to pay a sum as a settlement is not admissible to prove they owe the debt.

Let’s say your customer issues the following statement on its own: “We will pay $20,000 to settle up with you.” Can that be used as proof they owe at least $20,000? No, it cannot. The offer is not admissible as proof.

But, if the same client states, “We know that we owe you $30,000 with interest. How about we settle for $20,000?”, then the first portion of the statement may be used as an admission or acknowledgment of the debt. The offer to settle, however, can not be used against the customer.

The difference between the two scenarios is that the first is an offer of settlement for purposes of resolution. The second contains an admission of fact: the debtor owes a specified amount.

If the customer adds “for settlement purposes only” or “without prejudice” to the writing, then it’s a no-go. Even if the customer conveys that they owe $30,000 and interest and offers a settlement, neither the fact they owe $30,000 or the settlement offer can be used against them if the writing contains “for settlement purposes only” or “without prejudice.”

In order for the courts to encourage and promote discovery, any offers relayed under the guise of “without prejudice” are protected from discovery during the course of litigation.

Not all statements made during settlement negotiations are “excluded” from litigation. That’s why it is of the utmost importance that counsel handling your New York debt collection claim knows how and when an offer of settlement can be used in support of and defending debt collection claims

You should always be cautious of what you express and how you express it in settlement negotiations. This goes for your collection attorney as well. Their statements, if not made properly, can bind you to a settlement you may not wish to accept.