Debt Settlement Program Fees, Performance Vs Flat Fee
This topic delves into the old adage, “If it’s too good to be true, then it probably is”. With that said, I decided to dig in and uncover the “real deal” behind debt settlement fee structures. Most debt settlement companies charge their clients a monthly flat fee that believe it or not, fluctuates over several months.So why call it a flat fee? The reality is that the fees charged under this label are continuous and variable until the complete fee is paid. These fees, charged each month, are for future services to be provided. In every case that has crossed my path, these fees included anticipated or future settlement fees, as well as, additional service fees, most of which are built into the client’s monthly payment. When most people hear the words, “flat fee”, the assumption is, that they’re getting a good deal. I’ll ask the question; are they really?
Firms employing the flat fee model, collect their fees monthly, based on the consumers predefined draw schedule (funds drafted electronically from a consumer’s bank account) or a manual monthly contribution into a savings or escrow account. During the first few months, the early stages of this model, as each client contribution is collected, fee payments are accumulated by the debt settlement company. Over time, these paid in fees begin to ratchet down until the debt settlement company is paid in full. This process, usually lasts between 15 and 18 months, and more importantly, long before the consumer becomes debt free, and in some cases before a settlement with a creditor is reached. The reason behind this is simple, a large portion of the consumer’s monthly contributions (for saving) are used to pay future settlement fees up front. This process leaves minimal funds available to initiate negotiations and payment for settlements. Essentially, the program is “front loaded”, which frequently is the cause for high drop-out rates and complaints.
In order to provide a true comparison, let’s talk about another fee structure, which is used by a small group of companies in the debt settlement industry today. The performance based fee structure works just as it’s label suggests. A debt settlement company using this model must first produce a settlement for their client, in order to earn a settlement fee. A novel approach, if I do say so myself. Under this structure, the client pays a small enrollment fee, usually somewhere between 3% and 5% of the debt amount enrolled, and in some cases an additional small monthly service or account maintenance fee. This program increases the rate of savings, thereby improving the settlement opportunity. The key to producing positive client and creditor relations is to provide settlements earlier rather than later. Let’s look at it, a different way, Performance Fee vs. Flat Fee, here’s a good analogy; Would you pay a contracting company in full for painting your home, prior to them starting the job? Of course not, why would you! The same should hold true in debt settlement, but unfortunately it does not.
There are many pros and cons to debt settlement. Choosing a program that’s right for you requires due diligence. Don’t be bullied into a program without understanding the details! Get the facts.