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What debt resolution really costs

Fees run 15 to 25% of enrolled debt, charged after each settlement. Add the interest that piles up while you wait, and the savings are real but smaller than the headline.

01How the fee works

Most programs charge a percentage of the debt you enroll, not of what they save you. The range is 15 to 25%, and it is set at enrollment. On a $10,000 card enrolled at a 20% fee, the fee is $2,000, whether the account settles at 40% or 60%.

The fee for each account is charged from your dedicated savings account only after that account settles and at least one payment toward the settlement has been made. That timing is federal law for programs sold by phone. A company asking for a fee before any settlement is breaking it.

A few programs charge on savings instead, often 25 to 35% of the amount forgiven. The math can land in the same place; the difference is that a savings-based fee drops when the settlement is weak, and a debt-based fee does not.

02A worked example

Take $30,000 of enrolled card debt at a 20% fee, settling over about three years. The balances keep growing with interest and late fees for the months before each settlement, so the negotiator is bargaining against a bigger number than you enrolled.

Roughly where $30,000 of enrolled debt lands
Better caseWorse case
Enrolled balance$30,000$30,000
Interest and late fees before settlement$3,000$8,000
Balance at settlement$33,000$38,000
Settlement rate45%55%
Paid to creditors$14,850$20,900
Program fee at 20% of enrolled$6,000$6,000
Account fees over 36 months$300$500
Total out of pocket$21,150$27,400
Saved against the $30,000$8,850$2,600

The headline, "settle for half," points at the $14,850 line. The real number is the total out of pocket, and it lands at 70 to 90% of what you enrolled. That is still a saving, and the monthly deposit is usually well under what the minimum payments were. It is just not half.

03What the table leaves out

  • Taxes. Forgiven amounts of $600 or more may count as income. On $15,000 forgiven, that can mean a few thousand dollars at filing time, unless you were insolvent. Forgiven debt and taxes outlines it.
  • Credit. A drop of 100 points or more, and years of a weaker file. What it does to your credit has the timeline.
  • A lawsuit. If a creditor sues and wins, the judgment can add court costs and interest, and the account settles on worse terms or not at all.
  • Dropouts. People who leave the program partway have paid fees on settled accounts and still owe the rest, now with a damaged file. Finishing is where the saving is.

04Reading a program quote

Ask for the fee as a percentage of enrolled debt, the expected settlement percentage, the monthly deposit, the expected length, and the monthly account fee. Then build the table above with your own numbers. A quote that shows only the monthly deposit and the projected savings is showing you the two kindest lines.

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Related

  1. Debt resolution: the full guideWhat debt resolution is, who it fits, how a program runs month by month, what it costs in fees and credit, and where it stands against borrowing on the house.
  2. Forgiven debt and taxes, in plain termsWhen a creditor forgives $600 or more, a tax form usually follows, and the amount may count as income. The outline, including the insolvency exception, without the advice.
  3. What debt resolution does to your creditScores often drop 100 points or more. Late marks and charge-offs stay 7 years. Recovery usually starts 12 to 24 months after settlements. Here is the shape of the damage and the rebuild.

This path, in order

Debt resolution: the full guide

  1. 01Should you use home equity to pay off card debt?Moving card balances onto the house can lower the rate. It also puts the house behind the debt. Sometimes the better move is to reduce what you owe.
  2. 02What debt resolution does to your creditScores often drop 100 points or more. Late marks and charge-offs stay 7 years. Recovery usually starts 12 to 24 months after settlements. Here is the shape of the damage and the rebuild.
  3. 03Debt resolution vs. consolidation, counseling and bankruptcyFour ways to deal with debt you cannot keep up with. What each one pays back, how long it takes, what it does to credit, and who can actually use it.
  4. 04What debt resolution really costsYou are here
  5. 05Forgiven debt and taxes, in plain termsWhen a creditor forgives $600 or more, a tax form usually follows, and the amount may count as income. The outline, including the insolvency exception, without the advice.
  6. 06Which debts can go into a resolution program, and what can happen to themCards, personal loans and medical bills can be enrolled. Mortgages, car loans and federal student loans cannot. What enrolled accounts go through, from collections to a possible summons.