It is easy for debt to snowball if you suffer a major financial setback, such as losing a job or being diagnosed with a major illness. Most people in these situations consider filing for bankruptcy in order to get rid of the debt and get a fresh start. However, bankruptcy is not appropriate in every situation, and for some people, debt settlement may be the better way to go.
Debt settlement is a process by which a debtor settles a debt to a creditor for less than the total balance of the debt owed. Creditors realize that they are not able to collect the full amount by debtors 100% of the time. Therefore, where there is a chance of settling the debt, a creditor may be willing to take the lower settlement amount than risk never getting paid at all. Some debts, such as a mortgage or a car loan, are not generally settled, and bankruptcy may be a better way to resolve these debts.
Creditors are generally under no obligation to settle debts. However, through negotiation, some creditors may be willing to take a lower settlement amount. Negotiating with creditors can be tough, and in most cases, having a skilled negotiator with experience handling debt settlements can make a big difference. If the creditor agrees to a settlement, there are some things to keep in mind.
- The amount of the debt that gets cancelled in the settlement becomes taxable as income if it is over a threshold amount. This means that if a person owes $20,000 to a creditor, and settles the debt for $15,000, the debtor will owes taxes on the $5,000 that is cancelled. This sometimes comes as a surprise to debtors because they never actually receive $5,000 in cash or in their bank accounts, but the tax still attaches to the money.
- In order to ensure that the debt is truly settled, you must have it in writing, and confirm all the terms of the settlement are what you understand them to be. This is where having an attorney handling the debt settlement can come in handy. An attorney can negotiate on your behalf and ensure that, under the terms of the agreement, you do not end up owing any hidden fees, and that your debt really is settled.
- Even with debt settlement, your credit will still be negatively affected. However, if you are significantly behind on your bills, the settlement may not make as big of an impact on your overall score. Additionally, even with debt settlement, payments can be spread out over a period of time, and while making payments may help overall, it will not mean an immediate improvement in your credit score.
Call Us for Legal Assistance
Before you decide how to best deal with mounting debt, you need to know all your options. To schedule a consultation to discuss bankruptcy, debt settlement, and other ways you can manage your debt, contact us at Resnick Law, P.C., in Bloomfield Hills and Detroit, Michigan.
(image courtesy of Fabian Blank)