As opposed to most industries, the service fees charged by debt settlement companies have a direct impact on the services they’re offering.
For instance, when you hire someone to mow your lawn, the price they charge has no impact on their ability to complete the job. When you hire a debt settlement company, since your financial capacity is the key in respect to your success, the amount you pay in fees will immediately impact you.
The most critical thing for you to know is the more you pay in fees, the longer it will take you to settle your debts. And, the longer it takes you to settle your debts, the less likely it is that you will successfully do so.
Fees commonly charged by debt settlement companies
There are 2 different methods that debt settlement companies commonly employ when charging fees. They are…
Fees that are based on the amount of debt that you enroll…
I’m personally not too crazy about this method of charging fees. It doesn’t promote performance and the service fee is static, irrespective of the outcome.
This fee structure is usually the most expensive, generally 20-25% of the total debt that you enroll. This fee is usually more than double what I charge.
Fees that are based on the amount that you save…
I’m a huge supporter of this fee model, as it is the one I use for my debt settlement program. When debt settlement fees are based on the amount that is saved, you have the comfort of knowing that your debt settlement fee will be linked with your success.
I charge 15% of what I save you if your total enrolled debt is less than $150,000.
I charge 12% of what I save you if your total enrolled debt is between $150,000 and $299,999.
I charge 10% of what I save you if your total enrolled debt is $300,000 or more.
The difference between my fee versus 20% of what you owe is very significant.
Take a look at precisely how large the difference in fees is…
My Debt Settlement Fee
15% of what you save
Typical Debt Settlement Fee
20% of what you owe
|Settle debts at 60%||$1,800||$6,000|
|Settle debts at 50%||$2,250||$6,000|
|Settle debts at 40%||$2,700||$6,000|
|Settle debts at 30%||$3,150||$6,000|
Based on $30,000 in enrolled debt
Debt settlement fees, taxes and settlement costs
You may or may not have to pay income taxes on the amount that you save when settling your debts. The IRS grants an insolvency exemption to consumers who have a negative net-worth. This exemption will either reduce the amount of taxes that you will owe or eliminate them completely.
If your good credit is still intact and you possess a positive net-worth (meaning you will have to pay all of the taxes), you may find that after you add up the estimated cost of the settlements, debt settlement fees, and the income taxes that you may not actually end up saving enough to make debt settlement a make-sense option.
If this describes your situation, I highly recommend that you do the math and ask yourself one simple question:
Is it worth it to ruin my credit and experience the stress of debt settlement to save X?
For many people who are in this situation, they find that it is definitely not worth it. There is a strong chance you will too.
How to estimate the math…
Step One: Add 10% to the total amount you owe on the accounts you want to settle. Example: I owe $30,000 – this turns into $33,000
Step Two: Assume an average settlement percentage of 40%. Example: $33,000 is settled for $13,200.
Step Three: Estimate the taxes. Example: I save $19,800. I can expect to receive $19,800 in 1099-C’s that I may have to pay taxes on. If I do and my tax bracket is 25%, I will have to pay approximately $5,000 in federal income taxes and another $1,000-$2,000 in state income taxes depending on where I live.
Step Four: Add the taxes. Example: $13,200 + $7,000 = $20,200
Step Five: Add the debt settlement fee.
Example of 20% of what is owed comes out to a $6,000 debt settlement fee.
Total Cost: $26,200 – Actual Savings: $3,800
Example of 15% of what you save produces a debt settlement fee of $2,520.
Total Cost: $22,720 – Actual Savings: $7,280
Step Six: Pose the question: Is it worth it to ruin my credit and experience the stress of debt settlement to save $3,800-$7,280?
Obvious Answer: Definitely not worth the risk, stress and the destruction to your credit.
Debt settlement generally makes sense when you either owe a substantial amount of money or have already fell behind.
If you possess a positive net-worth (meaning you would have to pay taxes on the settlements) and your credit hasn’t suffered any damage yet, debt settlement can start to make sense if you have a high debt-load. Generally $50,000 or more.
If you’re already behind on your accounts and your credit has suffered, settling your debts generally makes sense regardless of how much you owe. The damage has already been done. You might as well resolve the situation for the least cost possible.
There are a lot of other considerations to make when evaluating debt settlement aside from fees and taxes. Please refer to my detailed 4-part series about debt settlement to gain a better understanding of how debt settlement really works.
I hope this information about the fees that are charged by debt settlement companies helps you. Please feel free to contact me with any questions.