Ways Debt Settlement Companies Collect Their Fees
Hey there! If you’re struggling with credit card or other debt, you may have heard about debt settlement as an option. Debt settlement companies say they can negotiate with your creditors to reduce what you owe. But before you sign up with one of these companies, it’s important to understand how they make money. Let’s break it down.
The Main Way: Fees Based on Debt Amounts
Debt settlement companies charge fees – usually a percentage of the debt they’re settling for you. This percentage is often 15% to 25% of the enrolled debt amount. So if a company settles $10,000 of your debt, their fee could be $1,500 to $2,500. This is how debt settlement firms primarily collect their fees.
-By law, they can’t collect these fees until after settlements occur. You need to actually get debt relief before they can charge you. The Federal Trade Commission made this rule in 2010 to protect consumers from being scammed.
So in summary: debt settlement companies make money by collecting a percentage fee on the debts they settle for you. But they have to do the settling first before charging you.
Upfront Fees
Some shady debt settlement firms try to get around the law by charging upfront fees. They may call it an “account set up fee” or “document preparation fee.” But really this is just an attempt to get your money before doing any work.
Legitimate companies won’t do this. Avoid any debt settlement firm asking for large upfront fees. That’s a red flag they may not actually settle your debts as promised.
-Monthly Maintenance Fees
Some debt settlement companies also charge monthly maintenance or service fees. This covers the ongoing work of negotiating with your creditors. These fees are separate from the percentage fees on settled debts.
Monthly fees often range from $20-50 per month. They start after you enroll and continue until all your debts are settled. So if it takes 2 years to settle your debts, that’s 24 months of fees.
These monthly costs chip away at the savings from settlements. Make sure to factor them in when evaluating debt settlement offers.
Watch Out for Scams
Unfortunately, the debt relief industry does attract scammers. Here are some common red flags:
- Charging large upfront fees
- Guaranteeing they can make your debt go away
- Telling you to stop paying creditors
- Requiring you to open a dedicated bank account they control
A legitimate company explains fees clearly, makes realistic promises, and lets you control payments. If an offer seems too good to be true, it probably is.
-Weigh the Pros and Cons
Debt settlement can sometimes help – but also comes with risks:
Potential Pros
- Settles debt for less than you owe
- Stops creditor calls and lawsuits
- Provides expert negotiators
Potential Cons
- Damages credit score
- Debts may not all settle
- Owe taxes on forgiven debt
- Fees can eat into savings
Make sure to think through whether the pros outweigh the cons for your unique situation.
Alternatives to Consider
Debt settlement is not your only option. Here are some other ways to tackle debt:
-- Credit counseling – Nonprofit credit counselors can help you manage payments through a Debt Management Plan.
- DIY settlements – You may be able to negotiate settlements directly with creditors yourself.
- Debt consolidation loans – These combine multiple debts into one payment.
- Bankruptcy – As a last resort, Chapter 7 or 13 bankruptcy discharges many debts.
Each option has pros and cons to weigh. Make sure you understand all your alternatives before deciding how to handle debt.
The Bottom Line
Debt settlement companies primarily make money by charging a percentage fee on debts they settle for you. By law, they cannot collect these fees until after settlements occur.
Beware of firms trying to charge large upfront or monthly fees. And consider whether debt settlement is truly your best path forward.
Dealing with debt is hard. But understanding how debt relief companies work can help you make the most informed choice.
Hope this overview helps provide knowledge and clarity. Let me know if you have any other questions!