The Cost of Debt Settlement Programs

Under scrutiny from the government and many consumer advocate groups, debt settlement companies are considered by many a risky choice for consumers trying to get out of debt. It is important to remember that the process itself does not actually change very much whether you negotiate your debt on your own or through a third party company. In fact the risks and consequences are basically the same which makes some people question why working with a debt settlement company is more of a risk than going it alone. The main differences between handling your own negotiations and employing an outside party to do so on your behalf lie in the cost of using a third party company as well as in the lack of control over your accounts when you empower another party to handle all communications. Here we will cover the costs of using a debt settlement company and whether or not it is worth the risk.

How much will it cost?

Determining the cost of enrolling in a debt settlement program is one of the most difficult and often confusing factors when deciding which company to entrust with your financial future. One thing is certain, you will pay for services provided, how much depends on several factors. Most companies do not disclose their fee structure on their websites due to the fact that each situation is different and most companies base their fee on how much debt is enrolled in the program. Another thing to consider once you find out how much the program will cost is how and when the fees are applied. Here are a few questions you should ask before proceeding with the enrollment process:

1) Are the fees front loaded? This refers to companies that charge the majority of their fees in the first few months of the program. The reason this is important is two-fold. First, any company that collects the majority of their fees in the beginning of the program might be less inclined to put forth their best effort on your behalf as they have already been paid for their services. The second and often more damaging consequence is due to the fact that fees are included in monthly payments. This means if you are saving $400 per month toward settlements and are charged $350 in fees for the first three months, you have only saved $150 toward settlements in three months.

2) Are there additional service or maintenance fees? Many debt settlement companies require monthly payments (savings) be placed in a third party FDIC insured bank. There may be service fees or maintenance fees associated with this account or other charges as a result of handling your credit accounts.


3) Do you offer a refund or guarantee? There are some companies that do not even bother to offer a refund or guarantee and then there are those that offer them but they are not very useful to the consumer. Find out exactly what if anything is covered or refunded and remember that the debt settlement process can take anywhere from one to three years, therefore money back guarantees should be based on the length of the program, not the first 30 days. Also, confirm beforehand that all monies in your account remain in your control. You should have access to and the authorization to recover these funds (minus agreed upon fees) at any time throughout the program.

Now that you have a basic understanding of how many companies charge for their services, you are probably still wondering how much it will cost? As a general rule (and please note every company is different) debt settlement companies are currently charging 15% of the debt enrolled in the program. If you enroll $20,000 of unsecured debt in a program, expect to pay around $3,000 in fees to the debt settlement company. If all things go well, you may settle that $20,000 for $10,000 which means you end up paying $13,000 to eliminate $20,000 of debt. Remember though that there are no guarantees with this process and no one can “promise” results.

Creditors may not agree to settle your account or may settle for a higher percentage than normal. In the worse case scenario, you may find yourself out the money you paid the settlement company and still have the same amount of debt and possibly face filing for bankruptcy in the end. The true cost of debt settlement simply cannot be summed up in a few words, each situation is different and each person may experience different results. This is the real risk of the process and one which should be carefully considered before enrolling in a program.