What Debt Settlement Companies Charge

How Much Do Settlement Companies Charge?

Average Debt Settled by Debt Settlement Companies

Debt settlement companies charge a fee, generally 15-25% of the debt the company is settling. The American Fair Credit Council found that consumers enrolled in debt settlement ended up paying about 50% of what they initially owed on their debt, but they also paid fees that cut into their savings. The report gives an example of a debt settlement client whose $4,262 account balance was reduced to $2,115 with the settlement. So, at first it would seem she saved $2,147, the different between what she owed and what the settlement amount was. But she also paid $829 in fees to the debt settlement company, so she ended up saving $1,318.

The report found that debt settlement clients settled an average of about 50% of what was originally owed, but realized savings of about 30%.

The average debt settlement customer has debt of about $27,000, most of it credit card debt, according to the report. If you settled that at 50%, you’d pay $13,500. But the fee on the balance would be $2,025, bringing your total payment to $15,525. That’s assuming the fee is 15% on the settled balance, rather than a higher percentage. If the fee is based on the original balance, it would be $4,050, meaning you’d pay $18,000.

Summary: Most debt settlement companies charge 15%-25% of your debt amount in exchange for their services. So, if you owe $10K, you could end up paying as much as $2,500 for the debt settlement company’s assistance. Alternatively, you can make your own offer and settle the debt by yourself by sending a Debt Lawsuit Settlement Letter.

Debt settlement is the process of offering a creditor or debt collector a percentage of the original value of an obligation in exchange for an agreement to eliminate the remaining debt. You can realize significant savings through debt settlement, often paying as little as 50% of an obligation with no further interest charges or penalties.

How does a debt settlement company work?

Debt settlement companies handle the administration and negotiation of settling debts on behalf of consumers. Generally, individuals who become customers of a debt settlement company enter an arrangement where they make monthly payments to the organization.

The debt settlement company saves the money in a special account. Once the consumer sends enough cash to settle a debt, the negotiation process begins. They’ll contact one of the customer’s creditors or debt collectors and attempt to negotiate a settlement agreement.

If the creditor or collector agrees to a settlement, the settlement agency will contact the client for approval before making the payment.

Debt settlement companies handle each creditor account individually. Eventually, the consumer obtains complete debt relief through settlements or other payment arrangements.

Most debt settlement programs last between two to five years. Following graduation from the program, consumers are usually free from debt.

Is working with a debt settlement company expensive?

It can be. Most debt settlement companies charge between 15%-25% of the overall value of a client’s debt for their services.

For instance, if the client enters $20K of debt into a debt settlement program, they may pay the company between $3K to $5K for their services.

If the debt settlement company can negotiate a debt settlement at 50% of the consumer’s original debt amount, the client will only pay $10K, saving $10K in the process.

However, the fees charged by the debt settlement company eat into the customer’s savings, so they may realize only a 25% discount after concluding the process.

If the debt settlement company isn’t as successful at negotiating a settlement, the customer may save even less—only 5% or 10% of the value of their debts.

Let’s take a look at an example.

Example: David is being sued by a debt collection agency for credit card debt of $10,000. He finds Freedom Debt Relief online and enrolls in their debt settlement program. The debt settlement company helps David reach a settlement of 60% of his debt, so he has to pay off $6,000 to the debt collectors. Freedom Debt Relief charges David a fee of 20% of his debt amount, meaning he has to pay $2,000 to them. David could have reached a settlement on his own and avoided the fees with Freedom Debt Relief, but he still saves $2,000 in the end.

Should I work with a debt settlement company to resolve my debts?

Some prefer working with a debt settlement agency. If the consumer needs help to save toward debt settlement, a debt settlement company can establish an arrangement for the customer to follow. There is no need to calculate monthly savings amounts or negotiate with creditors. The debt settlement agency handles everything for you.

However, the expense of a debt settlement company can knock out any savings you obtain. In addition, you’re giving the majority of the control to the debt settlement company. They’ll decide which creditor to pay off first.

If a debt collector tries to sue you, you’ll need to handle the lawsuit yourself. You can attempt to settle the debt before it goes to court, but you probably won’t be able to withdraw money from your account with the debt settlement company. Instead, you’ll need to come up with the funds from your savings or risk a court judgment.

Can I handle the debt settlement process myself?

Yes. If you take the time to learn about debt settlement, you can establish a savings account for debt settlement and negotiate with your creditors. You’ll save the additional expense of having someone else handle it for you, and you’ll be in a better position to fight potential lawsuits if a creditor decides to sue you.

However, debt settlement does take time, and it can be stressful. Most people try to avoid speaking with debt collectors at all costs. Attempting to negotiate with them on your own may sound like a task worse than going to the dentist for a root canal.

Be very careful if you decide to handle the debt settlement process independently. If possible, it’s best to try settling your debts via written communication. That way, you have a clear record of all conversations between you and the creditor that you can refer to if they renege on their agreement.

If you must speak with a debt collector, avoid making a settlement payment until you receive a written document from them outlining the terms of your agreement. You’ll also want to ensure that the debt collector is the proper owner of your debt. If they are not, you may lose your money and still be on the hook for the original value of your obligation.

Will debt settlement hurt my credit score?

Consumers already overdue on their debt payments have likely already seen a drop in their credit scores. If you can’t afford to keep making minimum payments and don’t see yourself getting out of debt anytime soon, debt settlement may be the right option.

Debt settlement won’t improve your credit score, but it can help you get free from creditors and debt collection agencies. Think of it this way: settling a debt for less than you originally owed won’t look great on your credit report, but paying nothing at all will look much worse.

Additionally, you can employ other strategies to improve your credit over time.

Settle your debt on your own

If you’ve been sued for a debt, you can reach a debt settlement without having to hire a debt settlement company.

Make a settlement offer by sending a Debt Lawsuit Settlement Letter to the party suing you. This will start the negotiation process. It’s best to start with a low offer so you give yourself room to accept any counteroffers.