Posted on May 25, 2009 at 10:12 am Hey I have seen a lot of helpful suggestions regarding debt settlement as a solid bankruptcy alternative on the website, but how do these companies make their money?

Posted on May 25, 2009 at 10:59 am Rita G, Debt settlement ccompanies usually use one of two fee structures. The first is to charge a percentage of the person's total debt amount. Companies using this structure on average charge 15% of the total debt amount and spread their fees out over a year and a half. The second is to charge a percentage of the savings on each account. Companies using this structure tend to charge between 20-25% of the savings and at times will have an up front payment or two that gives the debtor the opportunity to show good faith in the program and their committment to becoming debt free.

Posted on May 25, 2009 at 11:14 am Is one fee structure better than the other? Should I be looking for a settlement company who charges a flat fee or a settlement company who charges a fee based off of the savings?

Posted on May 25, 2009 at 11:50 am There is a lot of controversy in regards to this issue. Most people assume that a fee structure based off of the savings is more fair. I am not here to dispute that, it may in fact be the case. However, it is somewhat ironic because if you compare the numbers there is not a huge difference. The best way to break it down is to take a look at an example of someone who owes $10,000 in credit card debt and is looking for a settlement company. Let's say that the person goes with a company that charges 15% of the total debt amount ($1,500). Since the average settlement runs right around 50% (this is only an average!), the total cost of that person's program ends up being $6,500. Now, let's say that the person goes with a company that charges 25% of the savings and requires one up front fee from the client. If the debt again is settled for 50%, the total cost is going to be nearly identical! They will charge $1,250 for the fee. Add that to the $5 K the person has to  pay to settle the account, that is a total of $6,250. Now, take into account the fact that most up front fees are between $250-$500, the total cost may even be higher than the company who charges a flat rate! Keep in mind, all settlement programs are different and results vary, so this is not meant to represent an actual situation. But it does provide a solid breakdown of what a person is going to pay either way to work with a debt settlement company regardless of their fee structure.  

Posted on June 1, 2009 at 9:10 am I think some people prefer working with settlement companies who charge a flat fee of 15% of the total debt amount because they like knowing exactly what they will pay for the service. There is no grey area. Especially after dealing with credit card companies who take the luxury of jacking up things like interest rates and finance charges without properly informing or not warning the consumer that these actions will be taken.

Posted on July 30, 2009 at 8:32 am How do debt settlement companies make money from people who drop out of their programs? Do they make the people cough up the rest of the dough if they haven't paid out all of the fees?

Posted on July 31, 2009 at 11:26 am Well, if the person drops out of the program the debt settlement company can't really make any more money. I am not aware of any companies who make people finish paying the full fee amount if they can't complete the program. You should check their contract and see what types of money back guarantees are offered. A lot of companies will agree to refund service fees but retainer fees are usually non-refundable.

Posted on August 2, 2009 at 8:29 pm How do the non-profit debt settlement companies make money, then??

Posted on August 4, 2009 at 3:31 am I really have not heard of a non-profit debt settlement company yet. Debt settlement is a new industry. It's only about 5 years old. It's goal is to give consumers the right debt relief for their situation and at the same time, of course, to profit too.How do debt settlement companies make money? I suppose by enrolling more and more consumers into their program.

Posted on August 4, 2009 at 11:40 am Sorry to contradict Damon and Graham, but the debt settlement industry has been around since 1989.  20 years, not 5.  I do agree with them, however, in that I haven't heard of an NPO debt settlement company either.You will note that the 15% flat rate has been suggested for elimination by the FTC (the specification is currently up for comment).  They will make a final decision on or around October 9th of this year, but the FTC subcommittee recommended including it in the new rules by a 4-0 vote, so it's very likely you will see it vanish soon.The problem with the 15% flat rate is that not all debts can be settled, and even more settle for less than the 40-60% average that everyone touts.  This means that a consumer can wind up paying the 15% even if there is no settlement at all.  Companies with some ethics behind them only charge the client once the settlement is reached.  This is the system that the FTC has proposed to enforce within the industry.For more information,  here is the press release from the Bureau of Consumer Protection (http://media-newswire.com/release_1095701.html) which includes a link to the actual FTC proposal, which is currently up for comment.Alternatively, there is an article at the New York Times, and a discussion about the new rules on the Dr. Debt Facebook page. (www.facebook.com/drdebt)-Dr. Debt