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When Debt Settlement Fees Seem Too High

If you’re struggling with high credit card debt, debt settlement may seem like an attractive option. Debt settlement companies promise to negotiate with your creditors to reduce the amount you owe. But before signing up with one of these companies, it’s important to understand how debt settlement works and watch out for excessive fees.

Debt settlement firms charge a fee, generally 15-25% of the debt they’re settling for you. While this may seem reasonable, you need to look at the full picture. Here’s what to watch out for when evaluating debt settlement offers:

Upfront Fees

The Federal Trade Commission prohibits debt settlement companies from charging any fees before they settle one of your debts. But some companies try to get around this rule by affiliating with lawyers or calling fees “contributions” to evade the law. Avoid any company asking for upfront fees.

Total Costs

Calculate the total amount you’ll pay with a debt settlement offer. Fees, plus the reduced amount of debt you pay, plus any interest and late fees your accounts accrue during the process. Compare this to other options, like debt management plans or bankruptcy.


Debt settlement often takes 2-4 years. During this time, your accounts are going unpaid and interest and fees build up. Make sure you can afford to wait that long and that the settlement company provides services during this period.

Debt Reduction

There’s no guarantee your creditors will accept a reduced settlement offer. They may refuse to work with the debt settlement company. Get clarity on the likely settlement amounts you can expect.

Tax Implications

If a creditor forgives $600 or more of debt through settlement, that canceled amount may be taxed as income. Understand the tax consequences so you don’t end up with an unexpected bill.

Impact on Credit

Not paying your accounts will severely hurt your credit. Late payments, defaults, and settled accounts will all damage your credit report and scores. Be prepared for this consequence.


Some debt settlement companies are outright scams. They promise unrealistic results while charging high fees. Check complaints with the Better Business Bureau and consumer protection agencies before choosing a company.


Debt settlement is just one option. Debt management plans through nonprofits, balance transfer credit cards, 401k loans, and borrowing from friends or family are some alternatives to consider first.

Questions to Ask

If you do consider debt settlement, be sure to ask these questions first:

  • What are your total fees, and when are they charged?
  • How much debt reduction can I expect from my creditors?
  • How long will the process take from start to finish?
  • What services do I get during the settlement period?
  • Will I owe taxes on forgiven debt?
  • How will settlement affect my credit score and report?

Get answers in writing before signing up. Read the contract carefully and make sure you understand the full costs and consequences.

The DIY Approach

You may be able to settle your own debt directly with creditors without using a debt settlement company. This avoids fees but takes time and negotiation skills.

Start by prioritizing debts from most to least critical. Focus first on accounts that are behind, then unsecured debts like credit cards.

Before calling, calculate reasonable settlement offers of 40-50% of the balance. Have lump sums ready to offer.

When negotiating, be persistent and polite. Explain your financial hardship and ability to pay. Don’t take the first offer – negotiate the best deal possible.

Get any agreements for reduced balances in writing before sending payment. Be prepared to walk away if the creditor won’t provide fair terms.

Key Takeaways

Debt settlement seems appealing but can cost more than expected. Heed these warnings when evaluating offers:

  • Avoid companies charging upfront fees
  • Calculate total costs with fees and interest
  • Make sure you can withstand the credit damage
  • Research companies thoroughly first
  • Try negotiating your own settlements

With excessive fees, debt settlement offers can sometimes do more harm than good. But if you understand the risks and shop carefully, settlement may still provide debt relief under the right circumstances.


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