Understanding Debt Settlement Fees Up Front

Share There are major changes on amounts of debt settlement fees charged by settlement companies.

With the explosion of advertisements for debt settlement services in the wake of the latest financial crisis, consumers must examine changes and amounts of debt settlement fees charged by such companies.

Typically, today’s company’s will charge consumers a flat rate of 15 percent of the total amount of debt they want to have negotiated by a debt settlement service.

That means, that if consumers utilize the services of a company to negotiate twenty thousand dollars of unsecured debt then they can expect to pay three thousand dollars in debt settlement fees.

The 15 percent fee that consumers will pay is based on the amount of debt they submit to the debt settlement service for negotiation, not the amount that their debt is reduced.

So if after negotiation, the consumer owes twelve thousand dollars of his original twenty thousand dollar debt, the fee to the debt settlement company is still based on the original twenty thousand, not on the twelve thousand dollar amount, or three thousand rather than eighteen hundred dollars.

This formula is the most common way today of determining debt settlement fees. It was not always this way.

Debt settlement services used to work on a contingency method, often taking 25 percent of the amount they reduced a consumer’s debt by and receiving payment after such debt reduction.

The old contingency system was better for consumers because they only paid debt settlement fees after they had received a positive result, meaning successful reduction of debt.

Further, already cash-strapped consumers didn’t have to worry about paying for debt settlement services until after they had their debt reduced. However, obviously, a business is in a better position if it can get money up front, rather than wait until after a situation is handled and closed.

This is what led debt settlement companies to institute the popular 15 percent, pay up front debt settlement fees that are present in the marketplace today.

So the change from a primarily contingency based payment system for determining and collecting settlement fees to an upfront charge has meant that consumers seeking the services of a debt settlement company must clearly understand what they’re getting into with their debt settlement company, as well.

There are a variety of products and services that are marketed as alternatives to using debt settlement companies and at all times, consumers should remember that these might be workable alternatives as opposed to using the services of a debt settlement company and paying a debt settlement fee.

This is especially true because the debt settlement industry is not highly regulated which means that there are a lot of different organizations promising help with debt settlement with few standards to judge whether such outfits are legitimate and get good results.

The 15 percent debt settlement fee charged up front to consumers based on the total amount of debt they submit for negotiation is often required to be paid in full up front or in monthly installments.

This means that before consumers get the promised relief offered by debt settlement companies they are actually taking on an additional expense, specifically the payment to the debt settlement company.

It also means that the debt settlement fees are not performance based which potentially takes away that incentive for companies to work hard for consumers.

Finally, consumers should also consider what will happen if they fail to pay the installment or if one of these companies go out of business. It is a concern that debt settlement companies may disappoint consumers hoping for rescue from burdensome debt.

Therefore, consumers should take a few moments to consider that the debt settlement fees they are charged are less about the consumers and more about the current business models debt settlement companies use to maximize their profits.

Since the early 2000’s, the number of companies claiming to supply debt settlement services has exploded and marketing of these companies has changed as well.

These companies all want customers and while obtaining leads has always cost some money, these costs increased for debt settlement companies that faced competition from many other companies offering the same service.

In earlier years, with less competition, debt settlement companies could expect a greater return on investment for their marketing dollars, but as there was more competition, leads became scarcer and the marketing required for such leads became more expensive.

Some companies responded to the increased expenses involved in obtaining clients and in managing businesses that relied on a large number of such clients by instituting administrative fees, a 1 or 2 percent up front fee to cover the company’s expenses as they performed the promised services.

Such an arrangement left companies with enough money to carry on their tasks with the promise of a payday of 25 percent of amounts they can reduce off of the consumer's debt.

Companies soon added another monthly fee as a form of “service” charge to customers so that consumers found themselves paying a percentage or 2 or 3 percent for administrative costs, a monthly service fee and the same 25 percent of the amount reduced at the end of the process.

Soon the industry started using a flat fee of 15 percent up front. These changes of information in the debt settlement fees used by companies are important for consumers to consider before using the services of debt settlement companies.

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