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%, 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.
Beside 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 12th payment. So there is some variation in the way the companies collect their fees as well.
How do you know if this all makes sense for you? First, let’s look at the numbers. Suppose you have $20,000 in unsecured debt, and that you’re unable to make any significant headway in paying down your balances. You can typically expect a 40% to 60% reduction, so let’s say your settled debt amount dropped to $10,000. If you paid the debt settlement company 15% ($3,000), you saved $7,000 of the amount of unsecured debt you enrolled in the program. But perhaps even more importantly, you became completely debt-free in about 3 years on the balances that you had unsuccessfully struggled to reduce significantly before entering the program. Plus, your monthly payment on your debt dropped in the interim.
Debt settlement programs, however, 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 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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