How Much Does Debt Settlement Cost?

Fees Associated with Debt Settlement

• Settlement Fees: Debt settlement companies typically charge a percentage of the enrolled debt or the amount saved. Fees generally range from 15% to 25% of the total settled debt. For example, if you enroll $30,000 in debt and settle for $18,000, you could owe up to $4,500–$7,500 in settlement fees.
• Upfront Fees: Legitimate debt settlement firms do not charge upfront fees. Fees are only collected once a settlement agreement is reached.
• Administrative Fees: Some firms may include monthly service or maintenance fees, which can range from $10 to $50 per month, depending on the program.
• Tax Implications: Forgiven debt over $600 is typically reported to the IRS as income. For example, settling $10,000 for $5,000 could result in a $5,000 taxable event, potentially adding $1,000 or more to your tax bill depending on your income bracket.

Factors That Affect Cost

• Total Debt Amount: Naturally, the more you owe, the more you’ll pay in settlement fees. A $50,000 debt at a 20% fee could cost $10,000 in fees alone.
• Creditor Negotiation: The willingness of creditors to negotiate can influence the final settlement amount.
• State Regulations: Some states, like Connecticut, Illinois, and Maine, limit fees to a percentage of the actual savings achieved for the consumer, often between 10-15%.
• Duration of the Settlement Process: The length of time it takes to settle your debt can affect overall costs, especially if additional fees are incurred over time.

So, Is Debt Settlement Worth It?

As with most things, it depends— debt settlement can provide relief by reducing the total amount owed, but it will also negatively impact your credit score as the debt settlement company will require you go delinquent, and settlement often shows up as a negative mark. The process can take several years, and there is no guarantee that all creditors will agree to settle. Before committing to debt settlement, consider other options such as credit counseling, debt consolidation, or negotiating directly with creditors.

The Bottom Line.

Debt settlement can be a helpful tool for reducing financial burdens, but it comes with costs and potential risks. Understanding the fees and factors that affect the cost can help you make an informed decision. Always research and consult with a financial advisor before proceeding with a debt settlement program.

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