What Is the Cost?
What is the Cost of Doing Debt Settlement?
If you have a accumulated considerable debt, and are looking for some debt relief options, you might be considering the services of a debt settlement company for credit card debt elimination. It’s important to know up-front what the fees will be for these services, as you will be committed to them for some time.
Unfortunately, this is a tougher question to answer than you would think. When you call a debt management or debt consolidation company, you’re not likely to get a direct or honest answer. It took me about an hour on the phone with a representative from a debt settlement company to find out exactly how much their program would cost.
The essence of the programs that debt settlement companies offer is that they will put your monthly payment into a trust or fund, and pay the creditors out of this fund. The time limit on this program is 48 months, which is mandated by the FDCPA, or the Fair Debt Collection Practices Act. If your debt is significantly high that you could not repay the debt in 48 months, don’t even consider this as a possibility. The representative may try to convince you that they can help you, but don’t believe it.
In my phone interview, the representative from the debt settlement company told me there was no set fee–that it was included in the monthly plan. By the end of the conversation, I found out there were actually three fees charged by this particular settlement company:
- The enrollment fee, which is 5% of the total debt
- A monthly maintenance fee which is $50.00
- The success fee, which is 10% of the amount that the company saved you
Say, for example, that you owe $50,000.00 in credit card debt. When you enroll with the settlement company, you owe them $2,500.00, which is 5% of the total debt. That is your enrollment fee. They will not charge you this up-front, however, as it is rolled into your monthly payment.
Each month, you you are charged $50.00 in maintenance costs. Over the course of 48 months, this comes out to $2,400.00.
Then, finally, as they settle each of your credit card debt accounts, you will be charged a percentage of the debt that they saved for you. So, for the sake of simplicity, say you owed $25,000.00 on two credit cards, and each bank settled for 60% of the debt. That means you only need to repay them $15,000.00 each rather than $25,000.00 each. So you saved $10,000.00 with each creditor. You would be assessed 10% of the amount you saved. This amounts to $1,000.00 (10% of $10,000.00 that you saved) x 2, for a total of $2,000.00.
So, the total amount you will owe the debt settlement company will be:
- $2,500.00 enrollment fee
- $2,400.00 monthly maintenance costs
- $2,000.00 success fee
Is your head spinning yet? I tallied this up after the phone call, and took time to work out the math. This is a total of $6,900.00 that you pay this company for dealing with your creditors.
Add this to the 60% that you owe on your debt, which is $30,000.00 which must be paid to the creditors. This means the total amount you must pay to this debt settlement company over that 4-year period is $36,900.00. Spread out over the course of the 48 months, your payment plan must at least be $768.75 per month or you will wind up owing them at the end of the 48 months. Actually, what will happen is that your fund will be deficient in funds, and the last credit card account would not be paid.
The representative explained that there were ways to save money. For example, if you were able to repay earlier, you would save on the $50.00 monthly maintenance costs, and only pay for the length of time you are enrolled in their debt management program.
If you were to drop out of this program due to loss of income or some change in your financial status, you would lose your enrollment fee and monthly maintenance fees. If you had not yet settled debts, you would not owe anything on those, and the representative assured me they would return the amount in your “trust,” that was in excess of the fees you owe them.
This is $7,000.00 thrown out the window for no reason at all. Given what I have learned through my credit card debt elimination education, we can manage our own debt settlement negotiations quite easily. When you manage your own debt settlements, you manage it on your time-table and the control is in your hands. Most importantly, your money is in your hands, where it should be!
My first choice, hands down, unless you are opting for bankruptcy, is Charles Phelan’s ZipDebt program for do-it-yourself debt settlement and negotiation. He has a free informational e-book which you can download at his site, and offers a free consultation. With his coaching program, he is on call to help counsel you every step of the way.
It just doesn’t make sense to pay a debt settlement company thousands of dollars for something you can easily do yourself. At the very least, you can probably settle down another account or two or three with the money you save!