Debt Settlement Fees and Costs

Quick answer

This guide focuses on the cost side of settlement for unsecured consumer debt such as credit cards and personal loans. If you need the process first, see How Debt Settlement Works. If you're deciding whether settlement belongs on your list at all, see Is Debt Settlement a Good Idea?

The Consumer Financial Protection Bureau warns that debt settlement companies often charge expensive fees and that unpaid accounts can keep adding late fees, penalty interest, and other charges while a settlement is pending. The FTC also requires covered providers to disclose fees before enrollment and restricts when they can collect those fees. See the CFPB's debt relief guidance and the FTC's Debt Relief Services and the Telemarketing Sales Rule.

Start with the total amount you may have to pay

A settlement percentage answers only one question: how much a creditor may agree to accept on a particular debt. It doesn't tell you what settlement may cost overall.

Keep these items separate when you estimate the cost. Some affect the cash you pay to complete a settlement. Others affect debts that never settle or create a possible tax bill later.

1. The settlement payment

The settlement payment is the amount a creditor or collector agrees will resolve the debt. Until an offer is accepted, any percentage you're using is only an assumption.

A company can't guarantee what every creditor will accept or how long it will take. The CFPB also notes that settlement companies generally don't have prearranged agreements with lenders that guarantee a particular reduction.

2. Settlement-company fees

There isn't one universal settlement-company fee. Get the exact fee formula and estimated dollar amount in writing before you enroll.

For debt-relief services covered by the FTC's Telemarketing Sales Rule, the provider must disclose its fees before enrollment. For multiple enrolled debts, the rule gives covered providers two ways to allocate fees after the required conditions are met:

• A proportional fee. The fee collected for a resolved debt can be based on that debt's share of the total debt enrolled in the program.
• A percentage of savings. If the provider charges a percentage of the savings it achieves, the same percentage must be used consistently for each enrolled debt, and the savings are measured against the amount enrolled under the rule.

For covered services, the provider can't collect the permitted fee for a debt until it has reached a qualifying result, you've agreed to that result, and you've made at least one payment to the creditor or collector under the agreement. If several debts are enrolled, the provider can't collect the entire program fee after resolving only one debt.

If you negotiate directly with a creditor or collector, there is no settlement-company service fee. You still need to consider the settlement payment, any charges that built up before the agreement, possible tax consequences, and any debts that remain unresolved.

3. Dedicated-account fees

Many company-run settlement programs have consumers save money in a dedicated bank account while waiting for offers. The independent account administrator may charge a reasonable fee to manage that account.

For dedicated accounts covered by the FTC rule, the funds belong to you, including any interest earned. You must control the funds and be able to withdraw them without penalty, subject to the rule's requirements. The settlement company also can't own or control the account administrator, be affiliated with it, or exchange referral fees with it.

Ask for every account charge before you enroll. Even a modest monthly fee adds to the cost if the program lasts for years.

4. Interest and fees can keep building while you wait

Many settlement programs encourage consumers to stop making normal payments to creditors while money is saved for possible offers. An unpaid account can keep adding interest, late fees, penalty interest, or other charges during that time.

Those charges don't automatically become a separate amount you pay on top of a completed settlement. They can increase the balance being collected, affect negotiations, and make unresolved debts more expensive if no agreement is reached.

The CFPB warns that built-up penalties and fees on unsettled debts can wipe out savings achieved on debts that do settle. The creditor can also continue collection efforts and may file a lawsuit while you're saving for an offer.

5. Unresolved debts still count

A multi-debt settlement program is a series of separate negotiations. Settling one account doesn't resolve the others.

If a creditor refuses an offer or you leave the program before every debt is resolved, you can still owe the remaining balances. Those accounts may also have accumulated additional charges while ordinary payments were stopped.

When you compare costs, include what remains owed on unresolved debts. Leaving those balances out can make a settlement program look much cheaper than the outcome you actually reached.

6. Canceled debt can create a tax cost

The IRS says canceled, forgiven, or discharged debt is generally taxable income unless an exception or exclusion applies. Debt canceled in a Title 11 bankruptcy case and debt canceled while you're insolvent are among the exclusions that can apply in qualifying situations.

Don't assume the entire difference between the old balance and the settlement payment is tax-free savings. The tax result depends on your circumstances and on the federal rules that apply for that tax year. See IRS Topic No. 431 and consider a qualified tax professional if you need advice about your own return.

Worked example: a settlement discount isn't the same as net savings

The FTC gives an example that shows why company fees have to be included in advertised savings.

The creditor accepted half of the enrolled debt, but the consumer didn't save half after the company fee. The FTC says it would be deceptive in this example for the provider to claim $5,000 of savings while leaving its $1,000 fee out.

The example also doesn't include every cost that could apply in a real case. Dedicated-account fees, charges that build before settlement, unresolved debts, and possible taxes can change the final result.

Estimate your own settlement cost without treating an offer as guaranteed

Use confirmed numbers where you have them and label everything else as an assumption. A simple worksheet can keep the pieces separate.

Don't automatically add every late fee or interest charge to the settlement payment. If a creditor later agrees to a specific payoff, that agreement determines what resolves that debt. Added charges still matter because they can increase the amount owed before settlement and can remain fully due on debts that never settle.

Compare the settlement scenario with the payoff you already have

What a settlement company should tell you before you enroll

For services covered by the FTC's Telemarketing Sales Rule, the provider has to disclose important terms before you sign up. Those disclosures include:

• How much the service costs. The company must disclose its fees and important terms or conditions.
• How long the represented results are expected to take. For settlement services, that includes a good-faith estimate of how long you may wait before offers are made to creditors.
• What can happen if the program relies on stopped payments. The company must disclose the possible negative consequences.
• How much you may need to save before offers are made. If the program requires you to accumulate funds before negotiations or offers, that amount or percentage has to be disclosed.
• How a dedicated account works. If one is required, the company has to explain the account and your rights to the money.

Read the contract closely and compare the written disclosures with what you were told in an advertisement or sales call. If the fee formula isn't clear enough for you to estimate the dollar cost, ask for a written example using your enrolled debts.

Questions to ask about fees before you sign

• What exactly is the fee based on? Ask whether it is tied to enrolled debt, resolved debt, savings, or another measure.
• What dollar amount do you estimate I'll pay? A percentage is easier to evaluate when you can see the estimated dollars behind it.
• When is each fee earned? Ask what has to happen on a debt before the company can collect its fee.
• Are there separate account fees? Get setup, monthly, transaction, and other administrative charges in writing.
• What happens if a creditor refuses to settle? Ask whether you owe the company anything for that debt and what happens to your saved funds.
• What happens if I leave the program? Understand any earned fees, account-closing steps, and how your remaining funds are returned.
• How are advertised savings calculated? Make sure company fees aren't left out of the savings claim.

See where settlement fits among the other debt-relief options

Debt settlement fees and costs FAQ

How much do debt settlement companies charge?

There is no single fee that applies to every debt settlement company. For services covered by the FTC's Telemarketing Sales Rule, fees must be disclosed before enrollment. If multiple debts are enrolled, the rule provides two ways to allocate fees after a debt is resolved: a proportional share of the total fee based on that debt's share of the enrolled balance, or a consistent percentage of the savings achieved. Ask for the exact formula and estimated dollar amount that would apply to your debts.

Can a debt settlement company charge an upfront fee?

For debt-relief services covered by the FTC's Telemarketing Sales Rule, a provider can't collect the permitted fee for a debt until it has achieved a qualifying result, you've agreed to that result, and you've made at least one payment to the creditor or collector under the agreement. The provider also can't front-load the full program fee after resolving only one of several enrolled debts.

Can a dedicated settlement account have its own fees?

Yes. The independent company that administers a qualifying dedicated account may charge a reasonable account-management fee. For accounts covered by the FTC rule, you own and control the funds and must be able to withdraw them without penalty, subject to the rule's requirements.

Can interest and late fees keep growing during debt settlement?

Yes. Many settlement programs encourage consumers to stop making normal creditor payments while money is saved for offers. Interest, late fees, penalty interest, or other charges may continue to build on unpaid accounts, and creditors can continue collection efforts.

Is canceled debt from a settlement taxable?

Canceled debt is generally taxable under federal tax rules unless an exception or exclusion applies. Bankruptcy and insolvency are among the exclusions that can apply in qualifying situations. The tax result depends on the facts, so a settlement discount shouldn't automatically be treated as tax-free savings.

Does settling a debt for 50% mean I saved 50%?

Not necessarily. Company fees, dedicated-account fees, interest or late charges that build before settlement, unresolved debts, and possible taxes can reduce the benefit. The FTC also says savings claims for covered debt-relief services can't be inflated by leaving the provider's fees out of the calculation.