Debt settlement has costs

For Michigan consumers who are struggling to pay their credit card debts, it can feel impossible to catch up. In some cases, the balances outstanding are simply too high to pay down, and the cardholder might want to pursue debt settlement. Settling credit card debts is a legitimate process, but there are potential downsides that the cardholder should consider.

Those who hire debt settlement companies to negotiate their debts might be required to pay high fees. Some companies charge based on the amount of the debt forgiven or settled, and the fee might be as much as 25 percent. In lieu of employing a debt settlement company, many cardholders contact the credit card companies themselves or retain an attorney to communicate with them.

If the amount of debt discharged is at least $600, the Internal Revenue Service might be owed taxes. It may be possible to reduce or eliminate the tax liability, though, for people who are legally insolvent.

Settling a debt for less than the amount owed saves the person money but it might result in a credit score reduction. Even though the person pays the agreed-upon amount following negotiations, there is a note that goes on his or her credit report indicating that the debt was settled for less than the amount owed.

People who have insufficient income to pay their credit card debts might want to speak with an attorney. An attorney with experience in bankruptcy law and debt settlement might be able to negotiate principal reductions or forgiveness of fees and penalties with creditors. In some cases, filing for Chapter 7 could be a way to have these debts discharged.