In Michigan, debt settlement, or debt negotiation, allows you to pay a reduced balance that will be regarded as payment in full. Debt settlement is often good way to get debt relief if you have one or two debts with high balances that you can’t afford. However, there are a number of problems associated with debt settlement programs – including scams, credit score damage, time and tax consequences.
Some companies that offer debt settlement are scams. The Federal Trade Commission website provides details on the problems associated with debt settlement programs. Contrary to debt settlement companies, where there are no regulations, our bankruptcy attorneys are highly regulated by the State of Michigan. There are rules and guidelines that our attorneys must follow in order to stay in compliance with the State of Michigan.
Everyone knows that failing to pay your bills on time will result in a lower credit score. Debt settlement is no different, as paying a debt for less than the amount owed can also do damage to your credit score. In addition, debt settlement programs encourage you to stop sending money to your creditors which will hurt your credit report. Our office takes a holistic approach to your debt issues. Not only will we settle your debt, we also provide solutions for credit repair so you can rebuild you credit as quickly as possible.
How Does it Compare to Bankruptcy in Michigan?
The debt settlement process can be an extremely slow and unpredictable process. Some debt settlements can take as long as two years to get resolved. During this time, late fees and penalties accrue that can increase your total amount of debt. There is also the potential for lawsuits and wage garnishment. In contrast, a standard Chapter 7 bankruptcy takes 120 days from the filing of petition to discharge. Filing bankruptcy immediately stops debt collection activities such as wage garnishment and harassing phone calls.
There are also tax consequences to a debt settlement. The difference between what you owe and what you pay in a settlement is taxable because the IRS considers it debt forgiveness income. For example, if you have $10,000 in debt forgiven, and you’re in the 25% tax bracket, you could owe up to $2,500 to the IRS. Filing for bankruptcy does not subject an individual to a tax on forgiven debts.
It is important to speak with an experienced Michigan bankruptcy lawyer to determine a plan of action for your specific financial situation. Although debt settlement has a number of drawbacks, it may be the best solution for you. At Detroit Lawyers, PLLC, we are aware of all the potential risks and rewards associated with bankruptcy and its alternatives. We can discuss all your options, including debt settlement, to find the best path to improve your financial condition.
Contact our office at 248.237.7979 to schedule a FREE CONSULTATION.