The History of Debt Settlement Fees

By Charles
In July 25, 2008

Sometimes I feel like the “Lone Ranger” here at ZipDebt, shouting from the rooftops about why consumers should not pay 15% of their debt to third-party settlement companies. Regular ZipDebt readers already know my position on the front-loaded fee structure currently used by about 99% of debt settlement companies. My post from April 3, 2006 discussed some of the problems associated with the “15% upfront” model.

Now, attorney and longtime consumer advocate David Giacalone has written an excellent piece on the subject of debt negotiation fees. Although I’m sure his post will not win him many fans in the settlement industry, I for one greatly appreciate his effort. David is focusing on one example of a company that uses the “attorney model” for debt settlement. And while his article pertains to the questionable ethics of attorneys who charge a flat percentage of enrolled debt, it’s certainly a problem throughout the entire debt reduction industry, whether or not the firm in question is attorney-based. So I felt it would be worthwhile to discuss some of the history of the fee models used in the industry.

Consumer debt settlement evolved in the 1990s from a pre-existing model that went by various names, but was usually called “business debt arbitration.” Companies would often choose names that made them sound like a law firm, even though most were not law firms. So, “Howard, Fine, and Howard” (with apologies to the Three Stooges) would set up shop as business debt “arbitrators.” The fee model in vogue at that time was to charge a 1% retainer as a deposit, based on the amount of debt to be negotiated, with the primary fee handled on a contingency basis, and set at 25% of the savings achieved in the negotiation.

When I first started negotiating consumer debt in 1997, this is the model that I employed, and I even credited the 1% deposit against future fees earned. So the concept was based on 100% contingency. Most of the people I worked with were happy with this fee structure, since it provided some assurance that they would see results before having to pay any significant amount in fees.

Flash forward to 2000, as I became part of a company that was attempting to roll out debt settlement services on a nationwide basis. We entered the large scale market with essentially the same fee model, except that we charged 2% instead of 1%, and the 2% figure was now treated as an “administrative fee” rather than a simple retainer to be credited against future fees earned. However, the core of the approach was still intact, with the primary fee being based on 25% of the savings achieved in the negotiations.

The reason for the change from 1% retainer to 2% administrative fee was simple enough. It’s one thing to run a small individual practice, quite another matter to grow a large company with payroll, overhead, and marketing expenses. Within a matter of months, the 2% was adjusted upward to 3%, but at that time there were still no monthly fees charged to the consumer. Again, the reason for the jump was not greed, but rather marketing exigencies.

Speaking of marketing, therein lies the problem! In 2000-2001, it was possible to purchase a database of consumers who had “opted in” to receive email on the subject of financial assistance. In those days, we could send 5,000 email messages to well-targeted recipients for a cost of about $1,000, and expect a steady flow of “leads” to the sales floor. A single blast of 5,000 email messages normally returned between 60-80 responses from interested, motivated consumers. And it was usually possible to enroll about 15% of those respondents. So we could expect to bring aboard 10 or 12 new clients for every 5,000 emails sent. That translates to an “acquisition cost” of $80 to $100 per new client based on the $1,000 cost to do the mailing. This does not take into account sales commissions or other payroll expenses, but represents a very healthy acquisition cost in terms of advertising dollars expended.

To make reasonable financial forecasts, we operated on the assumption that our overall settlement percentage would average 40% (which it did for several years, until it slowly crept up to the current industry average of approximately 50%). So we expected to save the client 60% before fees were applied. Taking 25% of the expected savings of 60% yielded an assumed fee equivalent to 15% of the starting balances. (Starting to sound familiar yet?) With the average enrolled client at a level of $30,000 of debt, that meant a forecast of $4,500 in negotiation fees, plus another $900 in administrative fees (based on the 3% admin fee), for a total of $5,400 in fees to be collected over the life of the program. That’s a very healthy potential income off a $100 marketing acquisition cost.

Another way to look at the above figures is that we could generate a “lead” (in the form of an interested consumer) for approximately $12 to $16 each. However, this happy state of affairs only lasted for a matter of months, and since 2001 lead costs have been climbing ever upward. Today, an “exclusive live transfer” lead can cost up to $90 each! And leads of lesser quality (generated through a few million website “lead form” traps set up by dozens of lead brokers) can still cost $30-$50 apiece. Closing ratios on these lesser quality leads are typically around 5-7%, further eroding the ROI on marketing expenditures and inflating the acquisition cost of a new client.

One of the key reasons for the upward spiral in lead costs is based on the law of supply and demand. In 2000-2001, there were at most a small handful of such debt companies in existence, so there were only a few of us “fishing” in a very large pond. However, the debt settlement industry was (and still is) a mostly unregulated industry. So there were (and still are) very few barriers to entry. With no clear standards, no licensing requirements, and no minimum financial standard (performance bonds, etc.), anyone could set up shop and call themselves an “expert debt negotiator.” Many did. Within 1-2 years, there were dozens of copycat companies, all basically cloning the existing business model. With more and more people fishing in the same pond (although still a very large pond), the mounting competition for “fresh hot leads” drove the cost higher and higher.

When you are attempting to enroll 400-500 new clients per month, the original fee model means that you must have very deep pockets in order to get to the “back end” stream of income generated from negotiation fees. Enter the monthly “service fee,” which started out around $29/month and climbed from there. So now there were three separate fees in place, the 3% administrative fee (which other companies quickly bumped to 4%, 5%, even 8%, etc.), PLUS the monthly service fee (now typically $40-$50/month, or more), PLUS the negotiation fee of 25% of the savings.

I was present at one of the first trade conferences held by the debt settlement industry. At the conference, the CEO of one of the newer large-scale settlement companies gave a presentation in which he discussed the fee model his firm was implementing. Gone was the negotiation fee based on 25% of savings. It was replaced with 15% of the total enrolled debt as a FLAT FEE, to be paid by the client over the first 14 months of the program. I was stunned. In my estimation, this front-loading of the program fee removed the single most valuable aspect of the program from the consumer’s perspective – namely, that the fees were based results achieved. No results, no fee. Instead, the fees were now charged in advance of having accomplished anything at all for the client. This, of course, was wonderful for the debt settlement company, but a horrendously bad deal for the customer. In effect, the settlement company had now become just another creditor, elbowing out of the way the client’s legitimate creditors, and grabbing up front most of the money that should properly have gone toward settlements.

Within a matter of months, this new fee structure spread throughout the industry like an extremely contagious virus. Today, I estimate that about 99% of settlement companies charge fees based on the front-loaded model.

So that is how the magic 15% flat fee came to be the industry standard. It has no bearing whatsoever on the amount of actual work involved in negotiating debts. As David Giacalone points out in his piece, there is very little actual legal work involved, so it makes no more sense for a law firm to charge a flat 15% of the enrolled debt than it does for a non-attorney settlement firm. And a fee of 15% of the enrolled debt certainly makes no sense at all from the consumer’s perspective. It is merely an artifact of the manner in which the industry itself has evolved. If you think about it, it’s not even remotely logical. If a person has $30,000 of debt spread over 5 credit card accounts, the fee is $4,500. If the debt load is $100,000, also over 5 accounts, now the fee jumps to $15,000. Is it any more work for settlement firm to negotiate 5 larger accounts versus 5 smaller ones? No. But it makes even less sense for the consumer to be forced to pay this fee IN ADVANCE of any meaningful service being performed.


  1. Charles, this is a very helpful addition to the discussion of debt settlement fees. Many thanks for putting it together at a time when you have so many other irons in the fire that need tending. Although there is really nothing more that I can add to your history, I’m going to make two minor points:

    As a former FTC antitrust lawyer, I was intrigued by the rapid change in industry fee practices after a major firm announced its new fee structure an an industry conference. I’d love to know if there were back-room discussions amounting to a price fixing conspiracy.

    Also, a decade ago, I was most unhappy to see copy-cat “debt arbitrators” who tried to sound like they were lawyers, springing up in Upstate New York, after the initial media blitz by the Capoccia law firm. We had one in Schenectady headed by a fellow who later became famous for musty money stashed in his basement. The story is not relevant (except for the smell), but sure is amusing. See

  2. Charles:

    Thank you so very much for affirming my fee structure. I was concerned that my fee structure might not be in alignment with my companies mission statement. In researching, your blog has truly helped me.

  3. Hello Charles,
    Thank you for all the wonderful information about debt settlement. Currently,
    I’m looking for a good settlement company and so far talked to Statefarms
    Financial Org. (fees collected in your first 3 months), and Careone credit (15% taken off from you monthly escrow “savings” account for 18 months). I have a 38K unsecured debt and
    having a hard time coming up with a monthly payment of $1200.00. Would you
    be able to recommend a company that I can call. Thank you.

  4. Lilet, thanks for your comment. If you’re having a hard time coming
    up with your $1,200 monthly payments, then you should not be paying
    15% of your debt to a settlement company in fees! I don’t recommend any
    third-party debt settlement companies, because (assuming you are a
    good candidate for this approach) there’s no reason you can’t learn to
    do it yourself. Take some time to read the material on this site, and
    consider one of my training/coaching packages instead.

  5. there is a settlement company out there that designs their programs solely on the financial capabilites and limitations of the client. the fees are stretched out all the way out to the end of the program. There is no one size fits all program, that’s where the 40 percenters are getting kicked out of states and actually misrepresentting the financial situations of the client to their creditors. If a clients can only payback 25 cents on the dollar to their creditors, what good does a 40% industry average model program do for them, NOTHING, it outperforms their financial capabilities.

  6. Mark, thanks for your comment. I’m assuming you work for said company. I’ve always
    said that I have nothing against settlement companies per se, merely their ridiculous
    fee structure and use of obsolete tactics. I agree that a client’s financial situation
    must first be analyzed and professional fees adjusted accordingly. However, I still
    maintain that there is no reason for a well-informed consumer to hire a debt settlement
    company in the first place. Why pay fees at all when they can do it themselves? But the REAL
    problem with the settlement industry is that most companies are gunning for big volume,
    and by definition that means signing up a whole lot of consumers who are not a good fit
    for this approach. It’s actually a much narrower range of consumers who pass the
    suitability test.

  7. I couldn’t agree more. Almost all stllement companies will stick to the commission wall whatever they can. Most clients in our program just don’t want to deal with all of the burden of phone call activity and the correspondence and they also need help. Yes, anyone could do it on there own. I did many years ago myself. Most people are uneducated in the industry on the unsecured side.

  8. Dear Sir,
    I wanted to do comprehensive course on debt consolidation. I want to know some tips regarding the courses being offered for the PROFESSIONAL DEBT ARBITRATORS.
    I worked in the bank for 16 years as a credit officer and manager and during my professional life span i have done lots of consolidation of the debts to the commercial as well as Agricultural loans.
    I feel enormous potential for setting up or working in tandem with other similar debt consolidating firms.
    Please enlighten me with the valuable tips.
    Thanking you.


    Pranab Deb

  9. Pranab, thank you for your comment post. Debt consolidation and debt
    settlement are two completely different things. I have no opinion on the
    course that you are referring to, although I believe it pertains to debt
    settlement and not consolidation. Sorry, I don’t offer any training,
    programs, or services for people looking to get into the business. I feel
    there are already far too many individuals and companies operating in the
    debt industry already. And I strongly advise anyone against getting into
    debt settlement under a third-party business model, for all the reasons
    discussed on my website.

  10. Hi Charles,
    Thank you for taking the time to truly clarify the history and fee structure by the majority of the companies. Like you I believe in performing in order to get paid. Every day I am more concerned for the public.
    Having been in the debt settlement industry for nearly as long as you have, I have only seen more and more consumers get taken advantage of.
    People should truly do their homework and not only choose a company with the traditional fee structure, but also one that not paying the sales department commissions.
    We all know that in time like we are having now, it is very easy for people to say ANYTHING to earn a commission.
    Charles you are a huge asset to consumers and keep up your great work!

  11. The reason that debt settlement companies flourish is because people who are indebted for the most part are lazy. If they google how to settle debt there are numerous instruction on steps to settling debt. So blame those willing to establish a business model, employ people, pay taxes and help people who don’t desire to do something they can do for themselves.

  12. Spoken like a true debt collector — blame the consumer, as always. :-)
    Of course, the predatory practices of the banks, brutal debt collection
    methods, massively confusing and contradictory advice from “experts” would
    have nothing to do with the fear that drives people toward various rip-off
    solutions, right?

  13. Thank You Charles.
    I KNEW there was a performance-fee model out there.
    I have been in the debt settlement industry for awhile and have seen MANY “taking advantage of customers” techniques out there.
    Number one is the fee structure.
    How can we help customers if all the debt -settlement “Counselors” or in other words, “salespeople” out there are only considering their commissions? I have seen “salespeople” say that they will not help anyone who has less than a certain amount of debt before they consider on enrolling them.
    The “salespeople” do NOT service the accounts, especially for the so-called attorney based models.
    The “salespeople” are only doing INTAKE on behalf of the attorneys because attorneys are not allowed to directly solicite potential debt-settlement customers.
    We all know that negotiators and mediators do all the work. But they get paid a salary.
    Sometimes bonuses if they are able to get a certain percentage below the debt settled for less than initially claimed.
    And the idea of charging against the enrolled debt amount?
    I can’t believe that is the norm in this industry?
    I remember the days where we were taught to work for a living.
    Not try to find a way the take advantage of people, and in some instances, under the guise
    of a “recognized” name.
    I have worked for a well-recognized named company,use their very own BBB rating for the parent company and “cut and paste” their BBB rating onto the debt-relief website.

    Your model and fee structure should be the requirement for ALL debt-settlement companies.
    I will be happy when the day comes where this structure is required from every company that wants to involve themselves in the Debt-Settlement industry.

    I appreciate all your efforts and knowledge.

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