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Over the last decade, the State of Michigan has had its ups and downs economically. Unfortunately, most of the ups have been for the top 10% of all income earners and a few marginalized workers at the bottom who have become more employed as a group but with generally lower pay. Those in the middle, particularly those working in the manufacturing sector, have seen a continued decline in their economic fortunes. This has been reflected in the unemployment rate, which was among the highest in the country for a few years after the 2008 financial collapse but has since diminished significantly. Still, many of the high-paying manufacturing jobs which left are unlikely to ever return. The jobs which have replaced them are generally much lower paying and much fewer hours. All this adds up to a state whose residents are in a precarious financial situation.

It’s no surprise, then, that Michigan has had some of the highest bankruptcy rates of any state, going back well over a decade. With so many of its residents going into bankruptcy, it’s worth considering if that is the best option for people facing unmanageable debt loads. As it turns out, debt settlement can be a better option, although not for everyone.

Who can debt settlement benefit?

Debt settlement can be a great way for some people with consumer debt, or any unsecured debt, to get back on track without trashing their credit scores. It may not be ideal for everyone, however. Those with severe cash flow problems, little income or who are otherwise unlikely to be able to stay on a debt repayment plan may be better off pursuing chapter 7 or chapter 13 bankruptcy. Also, it’s worth noting that many personal finance experts view debt settlement, whether through consolidation or a lump sum payment, as equivalent to putting a band-aid on a gunshot wound. Without changing the underlying behavior that led to the out-of-control debt in the first place, they say, the debt settlement process may actually do more harm than good, even if it reduces payments, interest or the amount owed. This is because it could cause the debtor to continue running up charges on things they simply can’t afford and don’t need.

That said, the people who are most likely to benefit from debt settlement are those with steady income who have a concrete plan on how to change their spending habits to avoid running up similar debts in the future. Also, debt settlement is primarily a tool to be used for unsecured consumer debt. Debt settlement can almost never be used to get rid of all or part of student loans, alimony payments, child support and outstanding debts to the IRS. In fact, non-payment of some of the loan types just listed could land you in jail.

But if you qualify, debt settlement can significantly reduce monthly payments, interest and even principal owed. This can end up saving debtors tens of thousands of dollars in some cases, and allow them to avoid declaring bankruptcy.

Bankruptcy – the last resort

For some debtors, their unsecured debt load is simply too high to seek settlement. This is often the case with medical costs. People with inadequate insurance can quickly find themselves hundreds of thousands of dollars in debt and simultaneously disabled so that they can’t work, losing their only income. In situations involving massive debt loads, where there is little to no steady income, debt settlement may be off the table. The only option in such cases is often bankruptcy.

Yet there are strong reasons to avoid it, if at all possible. First, bankruptcy will damage your credit rating worse than any other event. While the record of bankruptcy may only last for 7-10 years on your credit report, you may be asked at any point throughout the rest of your life if you’ve ever had to declare bankruptcy. Such questions often occur in the context of job applications and interactions with the government. In many fields, it may be impossible to get hired if you’ve recently filed bankruptcy, including any government jobs that require security clearance.

Another reason is that almost all of your property will likely be liquidated under chapter 7. In Michigan, a debtor may be able to keep his primary residence under certain bankruptcy proceedings. But consider everything else, including cars, boats, motor homes and vacation properties as good as gone once you file chapter 7.

Yet another reason is that you may find it unusually difficult to get loans, and this can last for the rest of your life.

Debt settlement avoids all of these problems and, in some cases, may even allow you to maintain your credit rating, even after falling behind on payments. For this reason, it’s is an option worth pursuing for those with a game plan for getting out of debt and staying out and who have the necessary income to follow through on their settlement agreement.