Michigan Debt Settlement, Debt Consolidation, Debt Relief in Detroit, MI

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Tax & Credit Consequences



Debt settlement has tax consequences. Forgiven debt  is also considered by the IRS to be income, no matter what firm settles the debts. Contact your tax professional for details. But there is hopeful news for many people settling debts The IRS has certain provisions which allow forgiven unsecured debt to receive favorable tax treatment (even full exclusion from income!) if the taxpayer qualifies as having met IRS guidelines for being deemed “insolvent” at the time of the debt forgiveness. This does NOT mean that the taxpayer has to be declared “insolvent” by a court, or that the taxpayer has to register or file as a bankrupt. Instead, if net worth meets certain levels, forgiven debt is relieved of taxation. Contact your tax expert on how to qualify for this.

Even if your debts do not qualify for the IRS’ insolvency exemptions, you still have many options for managing tax consequences, to minimize the tax effect of debt forgiveness. Contact your tax expert for best results. RISK FREE does not undertake responsibility to be your tax preparer, nor do we formally consult about clients’ taxes.


Debt settlement has credit consequences. Failing to pay minimum amounts will mar your credit a little more severely each month, and if you run over half a year behind, cause a charge-off, one of the worst entries a credit profile can suffer. In the world of credit reporting, where each entry is rated from R-1 (perfect) to R-9 (terrible), charged off accounts register at the bottom, R-8 or R-9. But even if you are many months behind, you can limit the harm to your credit profile if you come to any settlement. Settled accounts are reported “paid as settled”, which registers near the middle of the scale (around R-5), much more harmless to credit rating, by comparison. The impact on your credit is much less severe than if you have a charge-off. This is just another reason to settle your debts.

Even though settlement can minimize harm to your credit, you still have to face the fact that your credit will not be perfect. Settling your debts is far better than suffering a charge-off, but paying “as settled” won’t preserve the near-perfect credit that follows from paying “as agreed”. Your credit rating will decline anyway, if you can’t afford to make payments as originally agreed. So you might as well keep the damage to a minimum by making settlements, instead of just letting the accounts be charged off.

Who’s Handling Your Money? – Disaster, If They Default!

Other companies make you enter into long payoff programs, so they can grab your money up front the first few months, then stretch out your settled payoff amount for years into the future. During that long period, they are handling your cash, and you have to worry whether that company will survive, to perform its middleman function and follow through to the last payment. If they ever miss a payment your whole settlement plan fails. Then all you paid in fees is wasted, and your debt is much worse than when you began. With RISK FREE, we arrange for you to pay direct, and you control your own funds!

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Michigan Debt Settlement, Debt Consolidation, Debt Relief in Detroit, MI