Cost & Fees
Best Debt Settlement Companies
Why Use a Debt Settlement Service?
We’ve been reviewing debt settlement for seven years. For our most recent update we spent 80 hours researching the industry and reviewing individual companies. We spent another 20 hours interviewing these debt relief companies and conducting secret-shopper-style customer calls. All of the companies we included are transparent and upfront with customers about the risks associated with these programs and follow FTC regulations that prohibit advance fees.
Our pick for the best debt settlement company is National Debt Relief. Based on our research and experience speaking with its representatives, this settlement company can reduce debt by up to 49 percent and has fees within the normal range of 15 to 20 percent. The representatives we spoke to were quick to reply and thoroughly explained the entire program to our secret shoppers. National Debt Relief provides all the forms necessary to notify your creditors you’ve entered a hardship program and gives you access to a client dashboard where you can get updates on how your settlement is proceeding.
If you value customer service most, Freedom Debt Relief is a good choice as its customer service is highly regarded in the industry. Customers get quick responses to calls and emails, and company representatives undergo three months of training before taking calls. Once you join you’ll get access to a dashboard that lets you track the progress of your settlement, see how much you’ve deposited and access useful budgeting and financial tools.
You may want a more personalized approach, and for that we recommend New Era Debt Solutions. This settlement company assigns each customer a dedicated account representative. Your account rep will update you when a settlement is reached with one of your creditors and will be on hand to answer any questions.
What Is Debt Settlement?
By entering a debt settlement program, you agree to have the debt settlement company negotiate with creditors on your behalf. As part of this program, you’ll stop making payments to your creditors and begin making one monthly payment into an account set up by the settlement company. You have to stop making payments because companies only settle delinquent debt.
After a certain amount of time has passed – usually six months, but it depends on how much you owe and who you owe it to – the settlement company will begin negotiating with your creditors on your behalf.
Debt Settlement Pros and Cons
Before entering a debt settlement program, you’ll want to weigh some of the drawbacks and advantages.
- It can lower the amount you owe: This is the main motivation for debt settlement. If you’ve amassed a large amount of debt, entering a settlement program has the potential to cut that amount by 40 percent or more. For example, if you have $30,000 in debt, a successful settlement program can cut the amount you owe to as little as $16,000 before fees.
- It can lower your monthly payments: When you enter a debt settlement program, you’ll begin making payments into a new account set up by the settlement company. This often has a side effect of lowering your total monthly payments, which can be helpful if you’ve been overextending yourself month over month.
- It can harm your credit: The biggest drawback to entering debt settlement is the impact on your credit. Because you stop making payments to your creditors, your accounts will go delinquent, which shows up on your credit report and can remain for up to seven years after. After settling, the creditor will update that debt’s status as being “settled.” Depending on your credit score at the beginning of the process, your score can fall 45 to 150 points.
- Your forgiven debt is taxable: The government considers forgiven debt to be income and taxes it at your normal tax rate, which varies depending on how much income you’ve earned. Once a creditor has settled a debt, you’ll receive a 1099-C cancellation of debt tax notice. You’ll put this into your return as other income. There are some exceptions, including some student loans, but generally unsecured debt included in debt settlement programs isn’t eligible
How Does a Debt Settlement Program Work?
A debt settlement program can take between two and four years. It’s a long process with many steps. Here’s a breakdown of the entire process.
- Initial consultation: When you call a debt settlement company, you’ll speak to an IAPDA certified debt specialist. They’ll go over your debt situation – whether you’re current on your payments, how much debt you have and how much you’re paying each month. Often they’ll do a soft pull on your credit to look at your individual creditors and how much you owe each of them.
- Sign up and enroll: After you’ve agreed to start a program, the settlement company will evaluate your finances and figure out how much you can afford to put toward the program each month.
- Stop paying creditors and make deposits: For a debt settlement plan to be effective, you’ll need to stop paying your creditors and deposit funds into the escrow account set up by the settlement company. These are the funds that will make up the settlement offers the debt relief company will make to your creditors.
- Settlement company begins negotiations: After about six months the settlement company will begin negotiating with your creditors. They’ll make settlement offers and notify you if a settlement offer is accepted. The best settlement companies offer client portals that allow you to track your funds and settlement offers.
- Pay the creditors (and the settlement companies): Once your offer is accepted you’ll transfer the money from your account to your creditors. You’ll also pay the settlement company. Since 2010 the settlement industry has moved away from advance fees. You’ll pay a certain percentage of the debt they successfully settle. The amount varies depending on the state you live in, since some states have caps on the percentage they can charge.
What Does Debt Settlement Cost?
The fee you pay a debt relief company is a percentage of the debt you want it to settle for you. Some states put caps on that percentage, but in general we saw a range of 15 to 20 percent.
One thing to note is that this is on top of what you pay your creditors. For example, if you settle $30,000 of debt for around $12,000 and the debt settlement company takes a fee of 20 percent on that debt, you’ll pay an additional $6,000 to the settlement company. So instead of saving 60 percent of your total debt, you’ll save 40 percent. It can still be worthwhile, but make sure to include the fees in your savings projections.
Another thing to keep in mind is that your debts are going to continue to accrue interest. It’s likely that because you stop making payments, you’ll be assessed late fees and penalty interest rates. In our interviews with debt settlement companies, they assured us that your monthly payment accounts for penalty rates and late fees.
In some cases they may be able to reach a settlement before you have enough to pay the settlement company’s fees. The settlement companies we interviewed all offer flexibility in these situations, letting you divide your payment into monthly installments.
Other Options: Credit Counseling, Debt Management, Debt Consolidation, Bankruptcy
Debt settlement is only one of many options for managing debt when it gets out of hand. The best debt settlement companies will recommend the ideal option for you. Several of the programs we reviewed partner with credit counselors, and some offer debt consolidation loans.
Credit Counseling: In some cases you may not meet the debt requirements to enroll in a settlement plan. If you don’t meet the minimum debt amount, you’ll be referred to a credit counseling agency. These are non-profits that can give you guidance on budgeting or enroll you in a debt management plan. In a debt management plan the credit counselors will negotiate a reduction on interest rates and fees with your creditors. These take longer than a debt settlement plan, typically five to seven years, and can also be detrimental to your credit score.
Debt Consolidation Loan: While debt settlement and debt consolidation are used interchangeably by many in this industry, an actual debt consolidation loan is different from a debt settlement plan. With a debt consolidation loan you get a loan to pay off your creditors and then only make payments to one lender, usually a bank or a credit union, though a few of the settlement companies in our review have a separate division that offers debt consolidation loans.
A debt consolidation loan has more stringent requirements than a debt settlement program. You may need to meet income requirements or have a certain debt-to-income ratio. You may also need to provide collateral, such as home equity, to be eligible.
Bankruptcy: This is the final resort for managing your debt. Bankruptcy is a legal process that can allow you to get rid of your debt. Chapter 7 bankruptcy, which has strict income requirements, can liquidate all your debt, though some of your assets will be sold to pay it off. A Chapter 13 bankruptcy requires you to work with your creditors to create a payment plan. Bankruptcy is very damaging to your credit score and can impact your future eligibility for loans and lines of credit. A bankruptcy will stay on your credit report for seven to 10 years and can reduce your score by up to 200 points.
How Do You Negotiate With Your Creditors?
Another possible option is to negotiate with your creditors yourself. If you’re wary of a debt settlement company, or feel like you can handle the negotiations yourself and want to save on fees, you can settle debts without the aid of a debt relief firm. The process is similar; you stop making payments and begin saving with the goal of making a lump-sum payment. You’ll have to wait a few months and may need to go back and forth with your creditors. DIY debt settlement isn’t for the meek or faint hearted, but it may be worth exploring if you are confident in your ability to negotiate.