How much does a debt relief program cost?
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Debt relief program costs range from 14% to 25% of your paid-off debt, based on our analysis of a sample of five debt settlement companies. You may also be charged a fee to maintain a dedicated account for the Program.
It's important to understand that debt relief companies, also known as debt settlement companies or debt cancellation programs, can leave you with more debt than you started with. Besides the cost of a debt reduction program, there are other risks to consider. We'll cover what you need to know about debt relief program costs and alternatives.
Key Takeaways
- Debt relief programs do not include account maintenance fees, which are approximately 14% to 25% of the total amount owed.
- Debt settlement companies can negotiate with creditors to pay your debt for less than you owe.
- Penalties and fees on unpaid bills can sometimes outweigh these savings and leave you deeper in debt.
- Working with a debt relief company can significantly damage your credit score.
- Alternatives to debt settlement include debt consolidation and nonprofit credit counseling.
What is a debt relief program?
A debt settlement is a process where a debt settlement company tries to negotiate with your creditors to pay you less than what you owe. During the program, the debt relief company will usually require you to stop all credit card payments. This can result in late fees, collection attempts (including lawsuits against you), and damage to your credit score.
A debt relief company may require you to deposit money into a special account to fund your debt settlement. Account maintenance fees may apply. You can make monthly payments into the account for three to five years or more.
According to a report commissioned by the Fair Credit Council of America, the average debt relief client saw a 32% reduction in their debt after settlement. However, a debt relief company may not be successful with all of your accounts. Fees and penalties may accrue on unresolved accounts, which may exceed the savings you receive from successfully resolved accounts.
Some debt relief companies are scams. Never work with a company that charges upfront fees, as this practice is illegal. The company must disclose the costs, risks, and timeline for becoming debt-free before you pay anything.
Note
Beware of “new government programs” or companies that promise to eliminate your debt, as these are red flags that indicate a scam.
How Much Does Debt Relief Cost?
According to The Balance's analysis, debt relief companies can charge anywhere from 14% to 25% of your paid-off debt. use a performance-based model, meaning you pay after the company has paid off part of your debt.
Payments vary depending on where you live, how much you owe, and other factors. You may also pay a fee to maintain a dedicated account, usually managed by a third party. Below are the disclosed fees of the top five debt relief companies.
Note
Legitimate debt relief companies do not charge a consultation or registration fee. If you are asked for a down payment and a bond to clear your debt, report the fraud to your state Attorney General's Office or the Federal Trade Commission.
When should you apply for debt relief?
You should only consider working with a debt settlement company after you have exhausted all other options.
If debt consolidation won't work for your credit score or debt amount, and you can't afford the monthly payments for a debt management plan, Chapter 7 bankruptcy may be a better option than debt settlement. This is because it takes less time, stops debt collection calls and lawsuits, and can eliminate or significantly reduce your debt liability.
However, if you do not meet the eligibility requirements for bankruptcy or do not want bankruptcy to appear on your credit report, you may want to consider a debt relief program. Just make sure you're aware
Alternatives to Debt Relief
- Debt management plan: A nonprofit may be able to negotiate lower interest rates and payments on your loans. You will usually pay a monthly fee to the agency that will distribute the funds to your creditors. This is known as a debt management plan. Credit counseling can also help you budget and avoid debt in the future.
- Debt Consolidation: involves consolidating your debts into one monthly payment by taking out a new loan or taking advantage of a balance transfer offer. The goal is to get a lower interest rate to save money. For example, you can use a low-interest personal loan or home equity loan to pay off your credit card debt, leaving you with one monthly loan payment. Or you can transfer your debt to a credit card with a 0% introductory period. But either way, you'll need good credit to qualify.
- The debt avalanche method: The debt avalanche method is the fastest way to get out of debt on your own without applying for a new loan. This involves making the minimum payments on all your debts and putting all your extra money towards the debt with the highest interest rate. Once that debt is paid off, you move onto the debt with the next highest interest rate.
- Chapter 7 bankruptcy: is a legal process by which you can erase many of your debts. Filing stops Chapter 7 collection efforts. Your creditors will have a chance to ask you questions and your non-exempt property will be sold to pay off your debts. You must meet certain requirements, but people who earn below the median income in their area are eligible. Chapter 7 bankruptcy stays on your credit report for up to 10 years.
- Chapter 13 bankruptcy: allows you to keep your property and make the payments that your budget allows for more than three to five years. After that, most of the remaining debts are written off. Documentation also stops collection efforts. Chapter 13 bankruptcy is open to people who earn more than the area median income, but it takes longer than Chapter 7 bankruptcy. It stays on your credit report for seven years.
Note
If you don't want to enroll in the program, you can try to negotiate with your creditors yourself. You can offer them a lump sum to pay off your debts or negotiate a lower interest rate. Some credit card companies may offer payment plans that make debt management easier.
Debt Management and Debt Settlement/Relief
Debt management plans are offered by nonprofit credit counseling agencies that require low monthly payments, while debt relief programs are offered by for-profit companies that charge 14% to 25% of your paid-off debt.
While credit counselors negotiate your rates and payments with your creditors, debt relief companies ask you to stop making payments. This can damage your credit and even result in lawsuits. For this reason, a debt management plan is often a better option.
| Debt Management Plan | Debt relief program | |
|---|---|---|
| Debt reduction | It only lowers interest rates and fees | It can reduce your debt |
| Debt Consolidation | Make a monthly payment to the credit counseling agency | Make payments to the debt reduction company over time |
| Effect of credit score | Over time, you can improve your credit score with on-time payments | It negatively affects your credit score |
| Other effects | It usually stops collection efforts | It could result in calls from debt collectors or lawsuits |
| Cost | Low monthly payments after a free consultation | 14% to 25% of your outstanding balance, plus an account management fee, if applicable |
| Tax implications | None of them | Depending on your situation, you may owe taxes on your forgiven debts |
Frequently asked questions
How long does it take to be debt free?
It usually takes three to four years to complete a debt relief program. During this time, you collect funds in a special account while the debt relief company negotiates the amounts you owe with your creditors.
How does debt relief affect your credit?
Debt relief programs have a negative impact on your credit score. That's partly because you'll hold off on payments and have a higher debt balance first. Your payment history and credit utilization have a significant impact on your credit score.
How much debt is too much?
There are many different opinions on how much debt is too much, but most financial advisors and lenders say that you have too much debt if your total monthly income is spent paying off the debt. Most financial experts say that you should aim to keep your debt-to-income ratio below 20%, which means that you spend no more than 20% of your gross income on debt, including your mortgage payment.
What is required to become debt free?
Each debt relief company has different requirements. For example, they may have credit score requirements, debt-to-income ratio requirements, proof of hardship requirements, or minimum loan amount requirements.
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