Just How Much Do Debt Settlement Companies Charge?

As you may have gathered by the deluge of debt settlement commercials, there is big business in debt. The hook offered by these services is that they can save individuals upwards of 50% on his or her indebtedness. The statement itself is not entirely false… simply misleading. It is important to understand that debt settlement agencies are mostly for-profit entities.  Unlike the non-profit debt counseling industry which examines various ways to assist individuals, debt settlement firms are selling a service.  As opposed to receiving several viable options through counsel, individuals contacting settlement agencies are typically encouraged explore the services offered.

What Is Debt Settlement?

As a refresher, debt settlement is when the debtor and creditor agree on a reduced balance which will result in the debt being satisfied.  Ideally, the debtor will have funds to pay the reduced amount immediately; however, more often than not this is unrealistic.  Therefore, consumers choose to enlist services to assist them in settling debt. In order to accumulate the lump sum necessary to settle an account, a debt settlement will evaluate an individual’s debt and establish a monthly payment amount based on their findings. When the payment is sent, the settlement company holds the funds in an escrow account, typically for several months.  Again, these monthly payments are made directly to the debt settlement company. Contrary to many clients’ understanding, these funds are not immediately sent to creditors. In the meantime, creditors are not being paid, and interest and late fees are being added to the accounts the agency has been contracted to settle – increasing an individual’s debt and damaging his or her credit profile.

Typical Fees

The debt settlement industry is largely unregulated; therefore, the fees each agency charges can vary.  Therefore, in order to understand the potential revenues these services generate, I’m going to explain two of the more popular fee structures.  Before start, we are going to need some information to base these figures on. In our example, let’s assume that an individual who is $30,000 in debt contacts a service for assistance and that over the life of the program, the debt settlement service is able to reduce the individual’s obligation to $15,000.

In the first scenario, the debt settlement company may charge the client a percentage of his or her overall indebtedness – somewhere in the neighborhood of 20%.  In the case of the example I have described, this person would be charged $6,000.  These fees would have to be paid first before any funds are accumulated in the service’s escrow fund.  In our second scenario, a debt settlement company may choose to charge a percentage of the savings they are able to negotiate, usually 25%.  Along with these charges, the service may also require an initial set-up and monthly service fee. Should the company settle the individual’s debt for 50% of what was owed, the company would charge $3,750 (25% of the savings) plus any other fees they would have established.  These fees are generally based on the original indebtedness and the amount of time one remains in their program.  For instance, a company may charge 10% of an individual’s debt as an initial fee and a $50 monthly service charge.   To accumulate the $15,000 to settle the debt, an individual would most likely pay the amount of $400 each month over a 42 month period. Therefore, the fees would total $3,750 for the negotiated settlement, $3,000 for an initial fee and $2,100 for monthly service charges.  Overall, in this scenario an individual would be charged a total of $8,850.

These are but a few examples, and I recommend that anyone considering using a debt settlement company do their homework.  Most of the feedback I received from individuals who have used such services has been negative.  Chief among the complaints are the damages to one’s credit profile and the exorbitant fees charged. Although debt settlement can be useful tool in reducing one’s indebtedness, it is an option that should be fully understood before it is undertaken.


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