Michigan Debt Settlement: Your Step-by-Step Action Plan

Michigan gives you 21 days to respond to a debt lawsuit. Miss that deadline, and a default judgment hands your wages to collectors without a fight. But if you act now, you can negotiate a settlement that cuts what you owe—sometimes by 40% or more.

Here's how debt settlement works in Michigan, the specific deadlines you face, and the tactical moves that protect your paycheck while you negotiate.

Why You Cannot Ignore a Michigan Debt Lawsuit

When a creditor or debt buyer files a lawsuit against you in Michigan, the court mails you two documents: a Complaint (listing what you allegedly owe) and a Summons (your official notice to respond). You have exactly 21 days from the date you're served to file an Answer with the court.

If you skip this step,even if you plan to settle,the court grants a default judgment. That judgment gives the creditor legal authority to:

• Garnish up to 25% of your disposable wages
• Freeze your bank accounts
• Place liens on property you own

Once a judgment exists, settlement gets harder. Creditors know they can collect through garnishment, so they have little incentive to negotiate. Filing an Answer keeps you in the driver's seat.

How to File an Answer in Michigan

Your Answer is a formal response to each claim in the Complaint. You're not admitting or denying guilt in a criminal sense,you're making the creditor prove their case.

Michigan courts require you to respond to each numbered paragraph in the Complaint. For each one, you'll either:

• Admit it (if the statement is accurate)
• Deny it (if you dispute the claim or lack information to confirm it)
• Assert you lack sufficient knowledge (which legally functions as a denial)

Then you'll list your affirmative defenses. Common ones in Michigan include:

• Statute of limitations: Michigan gives creditors 6 years to sue on written contracts (like credit cards) and 6 years on oral agreements. If the debt is older, they can't collect through court.
• Lack of standing: Debt buyers often can't prove they own your debt. Make them produce the original contract and a complete chain of ownership.
• Improper service: If you weren't served correctly, the court may lack jurisdiction.
• Payment or settlement: If you already paid or settled this debt, that's a complete defense.

File your Answer at the same court listed on the Summons. Send a copy to the plaintiff's attorney (their address is on the Complaint). Keep a copy for yourself.

If navigating bankruptcy feels overwhelming, our free bankruptcy screener can show you whether Chapter 7 or Chapter 13 might eliminate this debt entirely,sometimes a faster path than settlement.

Settlement Leverage: What You Have and What They Want

Once you've filed your Answer, you have time to negotiate. Debt collectors and creditors settle for two reasons:

1. Certainty: A settlement gets them paid now. A trial costs money and might end with you filing bankruptcy, leaving them with nothing.
2. Economics: Many collection agencies buy debt for 3-10 cents on the dollar. Settling for 40-60% of the balance still turns a profit.

Your leverage is your ability to make them work for it. If they have to litigate, their costs rise. If you mention bankruptcy (and mean it), they know they might recover zero.

How Much Can You Settle For?

Settlement amounts vary based on:

• Age of the debt: Older debts near the statute of limitations settle for less
• Type of creditor: Original creditors (like Chase or Capital One) settle around 50-70%. Debt buyers often accept 30-50%.
• Your payment ability: Lump sum offers get bigger discounts than payment plans
• Their documentation: If they can't prove you owe the debt, they'll settle for pennies to avoid losing in court

Start low. Offer 25-30% as a lump sum. If they counter at 70%, you can meet around 40-50%. If you need a payment plan, expect to pay more (usually 60-80% of the balance) because they take on collection risk.

Making Your Settlement Offer

Contact the plaintiff's attorney (not the original creditor,the lawsuit changes who you negotiate with). Send your offer in writing via email or certified mail.

Your offer letter should include:

• Case number and court name
• Your settlement amount
• Whether it's a lump sum or payment plan
• A deadline for their response (give them 10-14 days)
• A statement that settlement is contingent on a written agreement and dismissal of the lawsuit

Keep it factual. You don't need to explain your financial hardship or apologize. This is a business negotiation.

Sample Language

"I am prepared to offer $2,500 as full settlement of the debt alleged in Case No. 23-CV-12345. This is a lump sum offer, contingent on receipt of a written settlement agreement stating that this payment resolves the debt in full and that the lawsuit will be dismissed with prejudice. Please respond by [date]."

They'll likely counter. Expect 2-4 rounds of negotiation. Stay firm on your budget,settling for an amount you can't pay just delays the problem.

Get Everything in Writing Before You Pay

Never pay until you have a signed settlement agreement. This document must specify:

• The settlement amount
• Payment deadline (or payment plan schedule)
• A statement that this payment resolves the debt in full
• A commitment to dismiss the lawsuit with prejudice (meaning they can't refile)
• Confirmation that they won't sell the remaining balance to another collector

Michigan law doesn't require specific settlement language, but clarity protects you. If the agreement says they'll "dismiss" the case but doesn't say "with prejudice," they could refile later.

Once you pay, get a satisfaction of judgment (if judgment was already entered) or dismissal (if still in lawsuit phase) filed with the court. This officially closes the case.

What If They Refuse to Settle?

If the creditor won't negotiate or demands more than you can pay, you have options:

• Fight the lawsuit: If they lack documentation or the debt is past the statute of limitations, you might win in court
• File bankruptcy: Chapter 7 wipes out most unsecured debts (credit cards, medical bills, personal loans) in 3-4 months. Chapter 13 consolidates debts into a 3-5 year repayment plan, often for less than you owe. Learn more about filing bankruptcy and whether it's right for your situation.
• Wait for trial: Some plaintiffs drag their feet. If they don't appear or can't prove their case, you win by default

Bankruptcy stops lawsuits immediately through an automatic stay. If you're facing multiple lawsuits or the settlement amount is still unaffordable, bankruptcy might save you more money than settling.

Statute of Limitations on Michigan Debt

Michigan's statute of limitations is 6 years for most consumer debts, starting from your last payment or the date of your last account activity (whichever is later). If a creditor sues you after 6 years, the statute of limitations is an absolute defense.

But here's the catch: the statute of limitations is an affirmative defense, meaning you must raise it in your Answer. If you don't mention it, the court won't apply it,even if the debt is obviously too old.

Debt collectors sometimes sue on time-barred debts hoping you won't respond. If your debt is 6+ years old, file an Answer asserting the statute of limitations defense. The case will likely be dismissed.

Tax Consequences of Debt Settlement

The IRS treats forgiven debt as taxable income. If you settle a $10,000 debt for $4,000, the creditor may send you a 1099-C form for the $6,000 difference. You'll owe income tax on that $6,000.

There are exceptions. If you're insolvent (your debts exceed your assets) at the time of settlement, you may not owe tax on the forgiven amount. Use IRS Form 982 to claim insolvency.

Bankruptcy, by contrast, doesn't trigger tax liability. Debts discharged in bankruptcy are not considered taxable income. That's one reason bankruptcy can be a better financial decision than settlement.

Wage Garnishment in Michigan: What to Expect

If you lose the lawsuit or settle but don't pay, creditors can garnish your wages. Michigan allows garnishment of up to 25% of your disposable earnings (income after taxes and mandatory deductions) or the amount by which your weekly income exceeds 30 times the federal minimum wage, whichever is less.

Certain income is exempt from garnishment:

• Social Security benefits
• Supplemental Security Income (SSI)
• Veterans benefits
• Unemployment compensation
• Workers' compensation

If your income comes entirely from exempt sources, creditors can't garnish you,but they can still freeze your bank account if exempt funds are deposited there. Keep exempt income in a separate account and notify the bank immediately if funds are frozen.

When to Hire an Attorney

You can handle debt settlement yourself, but consider hiring an attorney if:

• You're being sued for more than $10,000
• The creditor has documentation that's hard to challenge
• You're facing multiple lawsuits
• You're considering bankruptcy as an alternative

Many consumer law attorneys offer free consultations. Michigan also has legal aid organizations that help low-income residents with debt defense.