Costs of a Debt Settlement Program

Understanding the costs associated with a debt settlement program (also known as debt negotiation) is important, particularly for someone who finds himself in a debt crisis. While the costs can vary from company to company, typically they charge a percentage of the total debt you include in the settlement program. The percentage charged is normally around 15 percent, but this can vary by a few percentage points depending on the debt settlement company that you choose.

Some debt settlement companies include an incentive in the mix, whereby their fees are based on the amount of money that they save you in negotiating the settlement amounts. Theoretically this gives the debt settlement company a stake in the actual settlement results, which should motivate them to negotiate the best possible settlements for their clients. This raises an important question in the selection of a debt settlement company: do the higher fees charged by companies with the incentive in their fee structure yield additional savings for their clients, or do they simply collect higher fees on essentially similar negotiation results? This is a difficult question to answer, as each debt settlement situation is unique and occurs at a specific point in time. However it is a question worth considering.

Photo by Stuart Dootson.

Besides the percentage charged, another difference between debt settlement companies is how they structure the payment of their fees. Some companies will apply the entire amount of your first payment(s) toward their fees, and some will spread out their fees evenly and include a fixed portion in your monthly payment plan. Others will do a hybrid version of the two, and will apply a portion of the fees to the entire initial payment(s) and then spread the remainder of the fees either evenly or over all of the monthly payments, or perhaps up to a specific payment, such as the 12^th payment. So there is some variation in the way the companies collect their fees as well.

However this is all going to change soon. Due to the large number of consumers who have been scammed or have complained to the government about unethical treatment by debt settlement companies, the Federal Trade Commission (FTC) has stepped in and created new rules. These rules regulate when these companies can collect their fees from consumers, as well as other aspects of the relationship between them. Beginning on October 27, 2010 companies that operate for profit and sell their debt relief services over the phone can no longer charge a fee “before they settle or reduce a customer’s credit card or other unsecured debt”. Consumers are encouraged to read all the details about this new so-called Final Rule, which also includes other related provisions that are due to go into force earlier on September 27, 2010.

Debt settlement programs are not a panacea. They are not recommended for all consumers with significant unsecured debt. If you can get out of bad credit card debt without the need for payment assistance and the support of specialized professionals, then you may want to avoid the drawbacks of entering a debt settlement program. There are other credit card debt relief solutions available, and indebted consumers should weigh the pros and cons of each to see which is the most suitable for their financial situation.

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