Credit card debt forgiveness is rarely a panacea

Credit card debt forgiveness may seem like an attractive option to Michigan residents who are struggling financially, but they may find that pursuing this course of action is futile because debt collectors expect a sizeable upfront payment before agreeing to forgive part of what is owed. Another problem with debt forgiveness is that it does little to help credit ratings as these offers are not generally made until accounts are seriously delinquent and credit scores have already plummeted precipitously.

Pursuing credit card debt forgiveness can also lead to tax problems as any debt that is forgiven is considered income by the Internal Revenue Service. Financial planners advise borrowers to avoid this situation by contacting their credit card providers before their accounts become 60 or more days past due. While lenders may not be willing to forgive part of the balance in these situations, they could offer to reduce or eliminate interest charges for up to a year. However, interest will usually still accrue and be added to the balance. This leads to an unfortunate situation where consumers are expected to pay interest on interest.

Debt settlement is another option that consumers may be wise to avoid. Companies offering these services may encourage their clients to stop making payments altogether so that their accounts fall into arrears. This strategy is designed to encourage lenders to be flexible and negotiate, but it can backfire and leave borrowers in an even worse financial situation. Signs that debt settlement companies may be less than reputable include large fees that must be paid upfront and misleading advertising alluding to government programs that do not exist.

Shadowy figures are drawn to the debt relief sector because the clients they deal with are often desperate. Attorneys with experience in this area may warn consumers about common scams and dispel the many myths surrounding personal bankruptcy. Attorneys might also explain that filing a Chapter 7 or Chapter 13 petition provides respite from the day-to-day stresses of crushing debt by preventing lenders or debt collectors from making any further demands for payment.