Debt Settlement Front-Loaded Fees Not In Consumers’ Best Interests

In April 3, 2006

While I am a big fan of debt settlement as an alternative to bankruptcy, I strongly believe that the do-it-yourself approach works better for consumers than using a professional debt settlement company. I hasten to add that I have nothing against third-party debt settlement companies. Many of them do a good job for their clients, and in fact I personally know a number of the owners and executives in this industry. Most of the criticisms of the industry are misplaced, and are usually put forth by people associated with credit counseling. In other words, the criticisms are usually from a source that is biased at best, and actively hostile at worst.

The critics usually display ignorance when it comes to any understanding of what the debt settlement industry is actually all about. Debt settlement is an alternative to bankruptcy, period. Once this is understood, most of the criticisms miss the mark by a wide margin. For example, it is widely stated that settlement companies “ruin people’s credit.” Excuse me? The client was already there, starting to miss payments, and headed off a financial cliff. I have personally talked with consumers who had more than $100,000 in debt and still had a good credit score. But they had only been able to keep up the $2,500 in monthly payments by using one card to make payments on the others, doing the credit card shuffle until the house of cards came crashing down. What the critics don’t realize is that most people who turn to debt settlement simply cannot keep going down their present path. The money simply isn’t there. They just don’t have the monthly cash flow to make it happen. Criticizing a settlement company for ruining someone’s credit when they are already in this situation is like complaining that a doctor doing open-heart surgery to save a patient’s life will leave a nasty scar behind. It’s simply part of the cure.

If I am in favor of debt settlement and have nothing against the companies providing this service, why do I recommend the DIY approach? There are several reasons, but the one I will concentrate on in this post is FEES. I’m not opposed to companies earning money for their services. I think the whole “non-profit” thing is largely a trick on consumers anyway, and I believe that for-profit companies are in a better position to pay a decent salary to their staff. No, my beef is not with the existence of fees in general. Rather, what I object to is the TIMING of the fees, as well as the sheer SIZE of the fees. Let’s say you owe $50,000 in debt. Most settlement companies will charge around 15% of the enrolled debt, so in this example, that’s $7,500 in fees. Frankly, that’s simply too big a number. But the timing of how those fees get collected makes the problem even worse. That’s because most companies FRONT-LOAD the fees. So that $7,500 would be deducted from the monthly program payment over a 10-18 month period. Let’s say the company collects the $7,500 over 12 months. This results is fee payments of $625 per month. Where’s the money to settle the debts with? A typical client who’s $50k in debt would pay into the program at around $750 to $1,000 per month in order to build up funds for settlements. That leaves only $125 to $375 per month building up toward settlements. At the end of that first year, the $7,500 in fees are fully paid, but the client has only saved $1,500 to $4,500 against $50k of debt. (Actually, it’s worse than that, because the debts will probably inflate to at least $60,000 during that period, due to all the interest, lates fees, and penalties.)

The big problem here is that some of the best deals happen right before charge-off, which is usually in the 6th or 7th month of the program (assuming the client was current or near-current at the start of the program). So this means that some of the best deals cannot be taken, because too much money has gone to fees and not enough toward savings for settlements. In the old days, the fees were on the back end, charged only AFTER successful settlement. We used to negotiate the first settlement, charge a percentage of the savings, and then start building toward the next settlement. This was much better for the consumer, but it’s tough to find a company out there that still charges this way. There are a few still operating with this contingency system, but even those companies charge 4-5% up front, plus monthly fees. So the original advantage of this type of program has been eroded by the steadily increasing fee structure of the industry.

Since the front-loaded fee structure, or variations on it, have become the norm, it makes good sense for a consumer to bypass those fees entirely by taking matters into their own hands. If it were not possible for consumers to negotiate on their own, that would be one thing, and those front-loaded fees would be justified. But the opposite is the case. Creditors routinely settle directly with consumers, and in fact PREFER to deal directly with the consumer without any third-party intervention. Most of the clients whom I’ve coached on how to do their own settlements are shocked at how easy it really is. In fact, in a lot of cases, it happens automatically as the account gets close to chargeoff. So the message here is simple: Save the fees by doing it yourself. You’ll get out of debt faster as a result, because 100% of your money is going toward debt reduction and none of it toward fees.



  1. You are correct. However there is another element that is huge when someone eithr comes to the realization he/she is in desperate trouble. Or, somone losing a job due to cutbacks in which you have worked 34 years. This is considered one of the 3 most traumatic events a person can experience. (Death of a spouse or child, major debilitating diseases/accidents two). The time after, is not a period of clear thought in which someone sits down and evaluates how he/she will research various companies, separate front-loaded cost factors, monthly payments, find complaints if any against firms, make a competent decision and proceed. Far from it. It is a desperate time. After decades of good employment and advancement, the security that comes with that is ripped away. That experience alone affects judgment. Regardless of what an “expert” may tell you, there is a stigma associated with someone who suddenly has no job. In this society, unless you have money, no respect is offered. Acquaintances no longer know you, neighbors are quiet, the guy who fixes your car, checks with the boss first to see if you’re still qualified to have your car repaired. People you once knew coming and going, no longer lock eyes and smile. They look the other way. Clubs and community organizations, who one may think would be a source of support and perhaps help by telling you of openings that may be available, go silent. Willingness to be sociable as before you were lost your job just isn’t there.

    Let an industry ” expert” tell you that this is just your post tramatic paranoia showing through. Everyone is an expert at something. Even pushing buttons on a remote. But few are the ones who can discuise thier timidity or unwillingness to risk their own social position by associating with you…the jobless one. It matters little if you had anything to do with a management decision to lay off, since no one knows for sure there are typically several variations going around about wh. Some as wild as having a relationship with the bosses wife/husband. As though he/she would even want to.

    Those experts, who advise careful study and analysis of many companies before signing on with one, are working inside their security bubble and spewing the same thing stock brokers say about what to do to protec yourself against “downside variations” in the market, “diversify your portfolio.” Bet you’ve never heard that huh? Or the “health providers writing advice on staying healthy, drink at least 8 glasses water a day (8oz ea.) eat 7 kinds of fruit, eat two helpings from each food group, walk a 3 miles 2-3 times a week, don’t smoke and stay away from stressfull situations. Right. Who does that? Who is willing to? Now it emerges, your aging clock is set genitaclly at conception. So, forget about spending the day in the bathroom from all that water and fiber. Eat what you want. In effect, they are dreamers saying how something should be done when the affected person is at his/her lowest level of self confidence and never having had to make such a decision, he/she has no idea how to go about it.

    I know from unexpected experience. Having the feeling of some level of personal security stripped away, self confidence shaken to the bone, little to no support or encouragement from former “friends” who perhaps think it is contagious, or has picked up a string of total incorrect infomation quickly slip away. What I have just described.

    Realization of the amount of debt occurs within this most venerable period. Anyone who comes face to face with being in debt big time isn’t going to be full of the perfect judgment expected of us.

    I am certain many secure experts will advise seeking counseling, nearly everyone suggests that.How can that ever be wrong. Its safe to say all the time. Maybe it is fine however, laying out your hard luck story to a stranger while in a crisis situation is not even on the radar screen.

    I know now that your program is the best.

    I went to a settlement company who charged $290 a month for 9 months and did not once do any more than send a small workbook of what I had to do. Namely, save, save, save and pay them, pay them and pay them. After paying nearly right at $5,000 during which I had only been able to save les than $3,000, the reality is my debt increased due fees, interest etc. The workbook said ” not expect for them to begin to do anything regarding contacting debtors until about the “^ mon mark. It has now been nine months and here are the facts.
    1. There has been no verbal or written communication from them what so ever. None.
    2. There has been no aid in developing a budget, nothing in the way of writing hardship letters to debtors. When I mean they have done nothing that means nothing.
    3. Beginning to pull out of an unusual mental condition one begins to realize these “settlement” people are preying on those their consultants tell them are in no condition to make good decisions. Think about it, would their efforts be equally profitable if they approached you when you’re in great emotional condition? You are ripe for their picking. They know it, you don’t. End of story.

    It does not matter that the company is a member of this organization or that. BBB United Way, received gobs of awards passed around among one another in their own industry. All the neat stamps of approval in the world means nothing and people should realize that. It may really mean that the company in question may have more than one face. Does that surprise you? Perhaps it treats whose in their immediate area of the country differently perhaps than those further away. Not hard to do. And it gets all kinds of good awards, certifications and stamps of approval. They are funded by a much large legitimate APPEARING company. They have an aura of legitimacy.

    It isn’t a matter of “being careful” or investigative homework. What you will often find while investiting are self planted happy PR all over the net, PR your banker reads that the company itself produces though “partners in referral” with other companies who of course sing one another’s praises.

    I”m tired of typing so I’m going to wrap it up with this. Unless you are a part of that industry or otherwise know it intimately, if you don’t ask questions, you will not be told anything. The problem is, a layman does not know key questions to ask.

    It reminds me of the overwhelming belief about whose interests are being served if you went to ANY real estate agency when you moved into a new town and told them what kind of place you are looking for. All the chauffeuring, lunches, happy talk happens and it will likely be years and only then by accident, that you pick up, by accident or overhearing that the agency and the agent him/herself was/is required to be solidly n the corner of the sellers of available real estate. Yep, the agent was working for those who were listing their homes with their agency, and essentially it is in their clients interest and the individual agents interests to show you homes that afford their clients and themselves the most money.

    You were just great fodder. Agents work hard but none will tell you when you walk in, that ” You understand, I will be working for those whose houses are listed with this agency.” Yeah.

    I hope most people who have been looking for homes via agency already understand that. If they didn’t, maybe they feel ripped of. That may not even be the case with “reputable” companies, but in today’s corporate environment, reputable companies are becoming and oxymoron.

    Do yourself a huge favor. Do nothing until it all sinks in. Get some advice and a little education and do your own debt negotiation. Cut out the leaches that knowingly are preying on desperate people.

    I fully realize this is hostile and far too long. Whats that you say? I’m irrational about it? Just get over it? Say it at a distance then.

    A final note. If anyone tells you that you simply made a bad decision to contract with the company you did, so what would you have society do to help people who make terrible decisisons. You made your bed, go lie in it?

    Don’t try to rebut that with words. Remember, avoid stress. Don’t talk, just whop them up side the head and walk away. I guarantee you’ll feel better.

  2. Although I was tempted to edit the above comment for brevity,
    I decided not to change a thing. Why? Because this is exactly the level of
    emotion and frustration that I hear on a daily basis while working
    with consumers who are struggling with debt problems. I don’t know
    what company this individual was working with, but it’s quite obvious
    that they did nothing to truly assist their customer. I think it’s an
    excellent point that people are at their most vulnerable when faced
    with a financial crisis like the loss of a long-time job. This is one
    reason so many debt-related scams are flourishing out there. People
    simply don’t have the emotional stamina to thoroughly research a
    program or company before taking the plunge. There are a lot of good
    companies out there, but finding them among the crowd of poorly-run
    outfits and scams can be a difficult challenge. Obviously, this problem
    doesn’t exist when you take matters into your own hands and do the work

  3. I really enjoyed. I don’t think that I want to do this consoladation or negotation thing. I understand that after the debt is “written off as a bad debt” there is nothing much that will take that off your credit report, except time, no matter even if you pay it? What is your opinion on that. Take care, Later, Roy Nichols

  4. Roy,

    My general view is that credit and debt, while related, are two separate
    issues. If your ONLY purpose is to clear up old dings on your credit file,
    then it’s true that settling an old account won’t remove it or solve that
    part of the problem. However, for most people pursuing debt settlement,
    credit is not the issue. The real issue is getting rid of the debt. This
    is also true for older accounts in a lot of cases. Why? Because an unresolved
    debt can follow you around forever. See my recent post on zombie debt for
    more on the problem of never-ending collection activity on older accounts.
    The issue of credit score aside, settling an old account is simply the most
    straightforward means of putting the issue to rest once and for all.



  5. Pingback: The ZipDebt Blog»Blog Archive » The History of Debt Settlement Fees

  6. Charles,
    I am finding this all very interesting indeed. Just yesterday I was approached by one of these companies – thank goodness we went out there and did some research on how we can DIY. Question – my credit score is fairly poor but I have not been late on any payments of my credit cards. Several are close to maxed out and we have about $40,000 in credit card debt and some with very high interest rates. Because I do not have late payments, should I consider debt settlement?

  7. Chris, I don’t know enough about your situation to make a recommendation
    one way or the other. It depends on how bad things are. You should do
    debt settlement if you *have* to, not just to save money off the balances.
    The purpose is to avoid Chapter 13 bankruptcy. Ask yourself this question:
    If debt settlement did not exist, would you otherwise be facing a BK filing?
    If the answer is yes, then you should consider debt settlement. If the answer
    is no, then see if debt roll-up will work for you instead.

  8. My husband and I are in debt with medical and credit card debt to the tune of $75,000, we are making the minimum payments luckily. I see that becoming a slim chance in the near future since my husband is on medical leave. I have checked into several settlement companies and feel the same way about their fees, is there any settlement company that does not collect the fee upfront? You speak of a diy method, which I am not afraid of doing. Where would I go to start the settlement process myself?

  9. Sheila, just go to the main part of and you can read all
    about my program to assist consumers with DIY debt settlement. That is the whole
    purpose of the website you’re reading!!! Purchase one of my programs so you learn
    how to do it properly and don’t have to pay those huge fees. But take your
    time and read all the info on the main part of the site first, so you make an
    informed decision.

  10. my only concern is my father left a house to my mother and my sister and me . it is paid for can they sue and take the house

  11. Tammy, you give no indication of the actual problem. If you are asking
    whether your own unsecured creditors can sue you for unpaid debt, then
    the answer is yes. Regarding the house, if a creditor sues you and obtains
    a judgment against you, then they can place a “lien” on the property. This
    does not mean that they “take the house” from you. Instead, it means you no
    longer have clear title, and would need to satisfy the lien amount (which
    inflates at interest the meanwhile) before either selling or refinancing
    the property.

  12. Charles,

    I have done more research than you can imagine and have talked to different types of relief companies and can’t find anyone to give me the advice I need to get out of debt. I have credit card debt of $96K and am able to pay the minimum payments and a little more usually, but am not able to make a dent. I do not know how to get out of this hole. Most have decent rates except for one at 29%, due to a day late payment 3 yrs ago. My credit score is good. I have no late payments, but my debt to income ratio is too high.

    I have talked to a company that will negotiate lower the interest rates and requires a weekly payment deducted from my account, they will pay the creditors and they say I will be debt free in 5 yrs. This sounds somewhat appealing, although I know they are working for the creditor. I’m currently paying approx $2200 a month on my own, and this program would be closer to $2000.

    I recently talked to a debt settlement company (with front end fees) who says they are affiliated with a top bankruptcy law firm that has been in biz 20 yrs, with debt settlement added 14 yrs ago. They claim to have my out of debt in 36-48 mo and my payments would be $1400, but no negotiations until their fee is paid. They claim that the attorney’s have personal relationships with the credit card companies and because of the volume of biz they bring, they can typically get much lower settlements, even 20-25%. Appealing, but as many, I’m concerned about them taking their money first and not doing anything on my behalf until much later. In addition to no feeling of security that they will even do what they say they will (based on what I’ve read from others.) And I have a feeling there are many company “faces” rolled into one so they can tout BBB ratings, affiliations, etc. I’ve seen many crossovers that concern me.

    I also have a rental property that has been destroyed that I’m in the process of listing for potential short sale. I’ve taken a beating on it for years and can’t do anymore. If it doesn’t sell, I’m going to be faced with Deed In Lieu or Foreclosure. I know this will damage my credit, so I’ve been researching to see if I should tackle the rest of my debt at the same time and then rebuild credit from there.

    I’ve also heard a lot about the Dave Ramsey course but don’t know if it would work with such a high amount of debt.

    I make decent money and can stay afloat, but can’t pay anything off and bring any relief. I rent currently but would like to buy again in the future. I need to know what someone in my situation should do. Do you have any suggestions or do you know of any financial or credit advisors you could recommend? Your feedback is greatly appreciated. There seems to be a lot of suggestions for people who can’t make ends meet and are caving in, but none for people just trying to move on and get back on their feet. It seems that if you make the minimum payments, you are actually penalized because no relief is offered. This doesn’t offer any solution to actually get out of debt.

  13. To “Confused in FL,” thanks for your post. You are in the classic credit card trap, where you are on what I call the “forever plan” of endless minimum payments. Debt rollup programs (as per Ramsey) only work if you pay over and above the minimums by a large enough factor, in your case about $500/mo over the mins. Not possible, obviously, or you would already have been doing it, right? Forget front-loaded debt settlement — 36-48 month programs are no longer viable. You will be sued long before you get to the finish line. Settlement *can* work in cases like yours, if handled properly (on your own with a good coach), but it all comes back to how quickly you can raise resources to settle with. Please feel free to request a free 20-minute phone consultation, follow through on the “homework” steps for the consultation so can prepare for the call, and then we can help you figure out which way to go.

  14. It really make sense. After reading your blog I completely changed my mind not to file for bunkruptcy. I have about 33,000 in credit card debts. Great work and THANK YOU.

Leave A Comment

ZipDebt = Fast Relief

Debt settlement is just as much about managing risk as negotiating savings. The 36-48 month programs offered by most debt companies have high risk for collection lawsuits. It's far more effective to "fast track" debt settlement in 12-18 months.

ZipDebt = Affordable Help

Instead of paying fees as high as 20-30% of your TOTAL DEBT, it’s far more affordable to work with a professional consultant who only charges 15% of the SAVINGS achieved via the negotiations. This approach saves you money and creates a win-win scenario.

Contact Us