Understanding debt settlement fees

Struggling with bills is a problem no one chooses to have. If you're battling to get back on top of your bill payments, you're not alone. If this happens, you may want to explore different options to help you take control of your finances.

Before you decide on any one option, make sure to do your research so you can make an informed decision based on your unique financial situation.

A credit card debt settlement is when a credit card company forgives a portion of the amount you owe in exchange for you repaying the remaining amount. The remaining amount can be repaid in one single payment or as a series of payments, as determined through the specific agreement and by law.

If you choose to settle directly with a credit card company, you likely will not be charged a fee for doing so. If you choose to work with a third party to settle on your behalf, they may charge a fee for the service.

According to the Consumer Financial Protection Bureau (CFPB), “Debt settlement companies are companies that say they can renegotiate, settle, or in some way change the terms of a person's debt to a creditor or debt collector.”

The typical process for engaging a debt settlement company’s services is as follows:

1. You sign up to work with a debt settlement company.
2. You deposit funds in a separate account that the company will use to settle your debts.
3. Once funds in the account reach an amount the debt settlement company believes is enough to settle your debts, the company negotiates settlements with lenders.
4. Once a settlement is reached with a lender, the debt settlement companies may reach out to you to approve the settlement before beginning to disburse payments.

For debt settlement services, these companies will negotiate on your behalf and reduce complexity with a single monthly payment. In exchange for that service, there is a fee. The amount of the fee varies by debt settlement company and by your unique situation.

Because different debt settlement companies charge different fees, you should be sure to understand exactly how each company works. If you aren’t sure how much a particular company’s fees are, ask them.

Advance fee ban

The Federal Trade Commission (FTC) issued a rule in 2010 that prohibited debt settlement companies from charging upfront fees for their services. DSCs can begin to collect fees as soon as they begin disbursement of payments to creditors.

Additional debt settlement fees

In addition to the settlement fees mentioned previously, you may also find that your debt settlement company charges you monthly for its ongoing services. It can take years for a company to successfully settle all your debt. If you determine working with a debt settlement firm is right for you, ask about setup fees for each debt and monthly fees for ongoing settlement services before you sign up.

The CFPB states that “dealing with debt settlement companies can be risky.”

What you should know

A debt settlement company may begin by telling you to stop paying your credit card bills while they negotiate with lenders on your behalf. This action may result in the following:

• Late fees
• Interest charges
• Penalties

If your debt settlement company asks you to place funds in a dedicated bank account for your debt management activities (an escrow account), you should read the terms of this account carefully. You may have to pay fees to the bank, including both setup and monthly charges.

Credit counseling agencies are dedicated to finding manageable ways to reduce and eventually eliminate your debt.

“Credit counseling organizations are usually non-profit organizations,” the CFPB writes. “Typically, their counselors are certified and trained in the areas of consumer credit, money and debt management, and budgeting.”

“Debt settlement companies,” the CFPB writes, “offer to arrange settlements of your debts...for a fee.”

The CFPB offers a side-by-side comparison of credit counseling agencies and debt settlement companies.

Debt settlement companies may help you successfully reduce your debt, but working with these companies is one of many possible ways to manage and reduce your debt. You should do your research and choose a form of debt relief based on your unique situation. Learning more about all possible options for debt relief will help you make important choices about your finances as you work to get back on track.