Debt settlement fees are one reality of a debt settlement process. Companies that agree to save you money by whittling down how much you must pay creditors to erase your debt will charge you for their work.
Although you can navigate this process on your own, having an experienced go-between to lead the process can make it go faster and save you money by negotiating a better deal. Most companies already have vast experience with these negotiations and often with the credit card companies you own money to. But in exchange, a company will charge fees of 15% to 35% of your enrolled debt.
These fees are among the things you should consider when deciding what company to steer your debt settlement process. Fees and fee structures vary from company to company. Understand what you would agree to with any group that agrees to settle your debt.
What are Debt Settlement Fees?
Debt settlement fees usually tie directly to the amount of debt you agree to settle or that you settle. Reputable debt settlement companies work on a contingency fee basis. They only collect their fee if debt successfully gets reduced or settled. These companies usually rely on two types of fees — service fees and administrative fees.
Types of Debt Settlement Fees
There are several types of common debt settlement fees consumers might encounter, from service fees to administrative fees to account setup and cancellation fees. A reputable debt settlement company will be transparent about potential fees.
Service Fees
Service fees are based on a percentage of the enrolled debt amount that the company successfully settles on your behalf. They usually range from 15% to 25% of the total enrolled debt or the settled debt amount, although some companies charge up to 35%. You don’t get charged until after the company reaches a settlement agreement with a creditor.
So, for example, if you settle a $5,000 credit card balance for $3,000, the 15 to 25% service fee would amount to $450 to $750 in that case.
Rates can vary by state and depend on several factors, including your debt profile and company policies. For example, companies may charge higher fees to customers with more debt enrolled, lower credit scores or debt that has already fallen into collection.
Administrative Fees
Administrative fees encompass a variety of charges, including account setup fees, monthly service fees, fees related to holding funds in a dedicated bank account required by law and other fees. Some may recur, such as monthly service fees and bank account fees.
However, debt settlement companies can’t collect fees from you until they successfully settled at least one enrolled debt, according to Federal Trade Commission regulations. Administrative fees can accrue during the full process.
Account Setup Fees
Some debt settlement companies charge a one-time, up-front fee, or set up fee, to open an account and have them pursue settlements on your behalf. It can be up to $50 or more. However, some states prohibit debt settlement companies from charging this kind of fee.
Dedicated Account Fees
Companies require that funds get deposited into a dedicated account for paying settlements. And sometimes, these accounts have monthly account fees, usually $5 to $15 per month.
Monthly Maintenance Fees
Companies may also charge a monthly maintenance or administrative fee, typically $10 to $20 per month, that covers the cost of servicing customer accounts.
Settlement Administration Fees
You may experience a one-time charge for each debt that gets settled. For example, a company might apply a $30 fee each time it settles with one of your creditors.
Cancellation Fees
If you cancel your debt settlement program for any reason, the company may charge a cancellation penalty fee, which ranges from $50 to $200 or more.
How Debt Settlement Fees Affect Your Finances
It’s easy to get excited by lofty promises of settling debt for pennies on the dollar. But entering debt settlement probably will affect your finances in multiple ways. For one, the fees charged by debt settlement companies can significantly impact your financial situation. You should factor them in when assessing whether this path makes sense.
For many U.S. households, the fees from using a debt settlement company can add up to thousands of dollars, depending on the amount of debt owed. And that’s on top of the lump-sum payments you must deliver to creditors. All together, using debt settlement can have a major financial impact on your family budget.
Consider the following implications that debt settlement fees could have:
- Less money to put towards debts: Debt settlement fees come directly out of the money that would otherwise go toward paying off creditors. If you have $10,000 worth of debt and 15% of that or $1,500 is paid to the debt settlement company, that’s $1,500 not going to reduce your principal balances.
- Reduction in net savings: The savings from debt settlement are the amount reduced by the creditor minus fees paid to the debt settlement company. So, for example, if you save $3,000 through a debt settlement, but pay a debt settlement company $1,500, the net savings are only $1,500. The perception of big savings is mitigated once fees are factored in.
- Limited funds for other expenses: No one signs up for debt settlement because they have their finances in order. For most people on a debt settlement plan, money is already tight. So, paying thousands in debt settlement fees means even less money is available in the household budget for other expenses like groceries, utilities, clothing, or medical care. This can make meeting day-to-day living costs more difficult for months or years.
- Causes further debt default: Defaulting on accounts as part of the settlement process hurts credit and results in late fees and interest accumulation, increasing balances owed. If debt settlement is unsuccessful, the consumer is left owing an even larger debt.
- Tax consequences: If lenders forgive $600 or more of debt, that amount can be taxed by the IRS. Debt settlement consumers may have to budget for the tax bill that would come due on the forgiven debt amounts from settlements further eating into potential savings.
When enrolling in a debt settlement program, consumers often get hung up on comparing fees between companies to find the one with the lowest rates. This is too simplistic.
How debt settlement fees hit family budgets vs. other debt help options should factor into any enrollment decision.
Negotiating Debt Settlement Fees
Debt settlement companies enjoy a wide latitude for fee structures and rates, but the industry has come under fire for overly aggressive and misleading marketing. Let that empower you to advocate for yourself and negotiate pricing.
The first step in negotiating debt settlement fees is getting fee estimates from multiple debt settlement companies. Reputable companies should disclose their fee structures when you inquire. Beware of any company that is evasive about fees or tries locking you into confusing agreements.
Look for companies accredited by the American Fair Credit Council or the International Association of Professional Debt Arbitrators. Reputable companies follow Fair Debt Collection Practices and charge only contingency fees, never upfront. Beware of any company asking for large upfront payments.
Here are tips on how to negotiate debt settlement fees:
- Ask about discounts for larger total debts enrolled, which require more effort for the company to settle. Sometimes fees decline on a tiered scale at higher balances.
- Review Interest & Fee Freezes: See if companies offer freezes on further interest/fees as a good faith measure during settlement talks, reducing your increasing balances.
- Ask for fee to be based on net savings. While most companies base their fees as a percentage of debt enrolled or debt settled, you can request it to be a percentage of the amount forgiven. This ensures the fee is proportionate to the settlement benefit you receive.
- Request fee waivers after 12 to 24 months if no settlements have been reached yet. This shifts some risk to the company for lengthy processes.
- Explain financial hardship and inability to afford such high fees relative to income or savings. Ask if they offer financial hardship discounts or sliding scale fees based on income, or special rates for public servants, military, or seniors. Some companies may offer free or lower cost programs in special cases.
- Compare any negotiated lower pricing to other debt relief options like nonprofit credit counseling programs. Debt settlement companies want your business, so knowing what you could pay elsewhere gives leverage.
- Check for hidden fees. Make sure you understand all the actual fees being charged, whether upfront costs, monthly service fees, per settlement costs, etc. Total them to calculate your all-in expenses.
Negotiating debt settlement fees takes effort and careful review of what companies propose, but consumers can push for fairer pricing and terms that help them maximize their debt relief savings.
In short, discuss all costs upfront. Consider everything negotiable. Get all agreed upon terms in writing.
Alternatives to Debt Settlement
While debt settlement is an option that some consumers pursue for debt reduction, it’s far from the only path to resolving unmanageable debt. Several other debt relief options exist without the steep fees and credit damage inherent to settlement. If the fees or risks of debt settlement seem too high for your situation, here are a few alternatives that may be worth considering:
Debt Consolidation
Debt consolidation works by rolling multiple debts into one new consolidated loan or credit account. The benefit is the person now has only one payment to make a month —usually a new and lower interest rate. A debt consolidation loan also gives the borrower a fixed repayment term for eliminating all debts, often between two to five years.
A downside to debt consolidation is that you still have to repay the entire rolled-up debt amount. Also, you will have to close your credit card accounts, hurting your credit score and your status as a borrower.
However, while you still must repay 100% of your debt, consolidation saves money by cutting interest costs. This allows faster payoff compared to minimum payments on high-rate accounts. Consolidation also avoids credit damage from delinquent accounts associated with debt settlement.
Credit Counseling
Non-profit credit counseling agencies can advise people struggling with debt about budgeting and strategies for handling unsecured debt. After assessing someone’s complete financial profile, a non-profit group can customize money management tips and potentially enroll the person in a Debt Management Plan (DMP).
Under a DMP, the agency works with creditors on the consumer’s behalf to make interest rates more affordable, waive late fees and consolidate bills into one monthly payment. The client typically repays the debt over five years or less.
Fees for credit counseling and DMPs are low compared to debt settlement companies. These non-profit programs also aim to educate clients on the wise use of household finances. They charge modest program fees but save substantially on interest.
Filing for Bankruptcy
As a last resort, when you can’t keep up with debt payments and need a fresh start, personal bankruptcy may provide the most effective debt elimination option. Declaring Chapter 7 or Chapter 13 bankruptcy stops collections calls, lawsuits against you, and wipes out eligible debt entirely or through payment plans, providing immediate financial relief.
The most common bankruptcy filing, Chapter 7, fully discharges unsecured debt like medical bills and credit cards without any asset seizure in most cases. The major downside to bankruptcy is that it devastates your credit scores for up to 10 years. Costs involved with hiring a bankruptcy lawyer also factor into the affordability equation around pursuing this nuclear option.
However, filing for bankruptcy provides federal court protection along with eliminating eligible debt, providing a “fresh start” for qualifying consumers with overwhelming unsecured debts.
