Debt Settlement Fees
If you're considering debt settlement for debt relief, you should also consider the fees associated with debt settlement, such as company fees and late penalties.
Choose Your Debt Amount
One of the main reasons people consider debt settlement is to save money. Ironically though, settling debt can be expensive, potentially causing your debt balances to double or even triple.
If you hire a for-profit company for your debt settlement, you could end up paying thousands of dollars for account setup and management while accruing late fees and penalty interest charges from your creditors. In the end, some people even get an additional bill from the IRS.
Before hiring a for-profit company to settle your debt, consider the true cost of their services.
What Fees Are Associated With Debt Settlement?
Settling debt can be a complicated and expensive process. Generally, it involves offering less money than you owe as a lump sum payment to your creditors, in exchange for having your full balance dismissed.
But how much does debt settlement cost? Depending on whether you manage the settlement yourself, or hire a company to assist, there can be a range of fees involved.
Debt Settlement Company Fees
According to the Consumer Financial Protection Bureau, debt settlement companies “generally charge exorbitant fees and rarely deliver on their promised results, leaving you worse off financially.”
Their account set up and management fees typically amount to 15% to 25% of the total debt you owe, and many companies won’t work with you unless you owe $10,000 or more on credit cards. If you owe a total balance of $10,000, the bill would equal $1,500 to $2,500. And none of that money goes toward reducing your debt.
If you really want to settle, but you want to avoid hefty debt settlement fees, you might consider negotiating with creditors on your own.
Late Fees and Penalties
Most debt settlement companies ask customers to stop making payments on their debt. But skipping payments can have serious consequences for your credit rating and your finances.
Just one missed payment on a credit card can result in a late fee as high as $40 or more, and the late fee for a loan payment is typically 3%-5% of the monthly payment amount. It’s unlikely, however, that you’ll miss just one payment, since the debt settlement process often takes 2-4 years.
After multiple missed payments, you may end up with a penalty APR applied to your balance—often around 29%. Plus, if your balance goes over your credit limit, an additional fee of $25 or $35 may apply.
Some for-profit debt settlement companies require you to set up a special bank account where your monthly payments are deposited. Of course, this is another service you might be charged for. Customers can also face fees to the tune of $30 for a late or missed payment to the debt settlement company.
Are Debt Settlement Fees Tax Deductible?
In addition to various debt settlement fees, there may be tax implications for settling your debt. If you have to pay legal fees involved with settling your personal debt, you cannot claim the expenses as a tax deduction.
On the contrary, you may have to pay taxes as a result of your settlement. If a creditor forgives $600 or more in debt, you will likely have to report the forgiven amount to the IRS and pay income taxes on the canceled debt.
Consult a Credit Counselor Before Settling Your Debts
If you’re looking for ways to manage debt, skip the debt settlement companies and talk to a credit counselor instead.
A certified, nonprofit credit counselor can help you explore cost-effective and credit friendly ways to reduce your debt, including a debt management plan, credit card debt forgiveness or just by making adjustments to your budget. And unlike debt settlement companies, credit counseling services are low-cost or free.
About The Author
Sarah Brady is a Personal Finance Writer and educator who's been helping people improve their financial wellness since 2013. Sarah writes for Experian, Investopedia and more, and she's been syndicated by Yahoo! News and MSN. She is a workshop facilitator and former consultant for the City of San Francisco's Affordable Home Buyer Programs, as well as a former Certified Housing & Credit Counselor (HUD, NFCC). Sarah can be contacted via sarahcbrady.com.
- N.A. (2020, December) Publication 529 (12/2020), Miscellaneous Deductions. Retrieved from https://www.irs.gov/publications/p529
- N.A. (2023, August 02) What are debt settlement or relief companies and should I use them? Retrieved from https://www.consumerfinance.gov/ask-cfpb/what-are-debt-settlement-or-relief-companies-and-should-i-use-them-en-1457/
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