Costs Of Debt Settlement Services

Consumer debt in the United States has reached epidemic proportions. It has been estimated that the average amount owed in consumer debt in the U.S. is over $15,000 per family. The pressure from this amount of indebtedness has led many to debt settlement companies to find relief.

THE ADVANTAGES OF DEBT SETTLEMENT

When a consumer reaches a point where his/her credit payments have become impossible to pay, to the point that they are behind in payments and their credit scores are beginning to be adversely affected, they begin to consider starting over by turning to bankruptcy as a remedy. Though bankruptcy does offer credit relief, it is usually at a substantial cost, both to the debtor's credit as well as to their assets. Debt settlement companies offer a valuable compromise. By contacting creditors and negotiating lower principal and interest levels for the debtor, as well as managing the payments and scheduling them all over a precise timeline, the debtor is offered serious financial relief along with less damage to their credit report. The companies charge a substantial fee for their services, but despite this additional amount placed on the debtor the benefits quite often outweigh the cost of the process.

THE COST OF DEBT SETTLEMENT SERVICES

Debt settlement companies vary according to the amount they charge for their services. Generally it will be a percentage of what they save you through their services, or a percentage of your total amount of indebtedness. In either case, 15 percent of your total debt is not unusual. For example, if you owe $10,000 and the debt settlement company negotiates a reduction of 50 percent, bringing your total debt to $5,000, you would still owe the debt settlement company $1,500 (15% of the original $10,000). So you would have gone from $10,000 down to $6,500, which is really a 35 percent savings.

When considering the cost of debt settlement you should also factor in any additional taxes you will be required to pay because of forgiven principal by your creditor. Assuming you are not insolvent (owe more than you have in assets), you may have to pay taxes on the amount of money forgiven on your principal by your creditor. In the given scenario above, the amount saved on the principal was $5,000. At a tax rate of 25 percent, you would owe an additional $1,250 in taxes. Therefore the total cost of employing the debt settlement service for a $10,000 debt could be ($6,500 + $1,250) $7,750 which means that even if the debt settlement company negotiates a 50 percent reduction in your debt, you are only realizing approximately a 22.5 percent reduction in what you actually pay. Of course if the debt reduction company is able to reduce your principal by a higher amount, then your savings will increase; however, if they charge a fee of more than 15 percent for their services, your total cost could escalate.

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