Helbing Law Office Logo by Timothy Helbing located in Appleton, WI serving chapter 7 and chapter 13 bankruptcy

Wisconsin’s Alternative to Debt Consolidation

Debt problems can be overwhelming.  Looking at those monthly minimum payments often feels like trying to fit a square peg in a round hole.  Once the realization that help is needed, many people look to debt consolidation as the answer.  But remember, as your mother would often tell you, “there’s no such thing as a free lunch.”

At face value, it seems like a great option.  One manageable monthly payment to a debt consolidation company and three years later, voila!  Debt free.  If it were only so easy.  Here are some things to consider when evaluating your options.  First, is there a huge initial fee?  What is the fee going towards?  A reasonable “set up” is appropriate but beware of the large fee that is non-refundable.  Next, are you being told not to speak with your creditors?  This often results in you being served with a lawsuit down the road.  Also, how is the monthly payment being applied?  Is the company you hired making payments on your debt or simply “pooling” the money to make an offer down the road?  Remember, if payments aren’t being made, it will be reflected in your credit report.  Furthermore, creditors aren’t obligated to accept any settlement offer down the road.  Finally, and this is important, debt settlement is a taxable event.  If you settle a debt for 5o cents on a dollar, the fifty cents you don’t have to pay back is imputed income to you.  Expect to receive a 1099-C from your creditors at the end of the year and the IRS will be expecting you to pay taxes on those savings.

A better option exists for Wisconsin residents.  A little-known law was enacted in 1937 to help Wisconsin residents struggling with high interest loans.  A section 128.21 is an alternative to both bankruptcy and debt consolidation.  It is a three-year repayment plan that puts the consumer in charge.  Essentially, the consumer decides which debt to put in the repayment plan.  Interest stops accruing on debt in the repayment plan. Also, creditors are prevented from all collection efforts (i.e., wage garnishment) for debts included in the repayment plan.  Finally, since you are paying 100% of the principal back, it isn’t a taxable event.  No taxes will be paid on the interest saved.

Obviously, this is not an option for those with significant debt.  But, for those with under $10,000 worth of debt, this is a great option.  If you are interested in learning more, or simply to discuss all your options to debt relief, please feel free to contact me.

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