How Much Is Debt Payment Really?

Struggling with debt is not easy, especially when there is no clear way forward. Many people see a light at the end of the tunnel with a debt settlement plan, though – and indeed, these plans can hold many promises. Three-quarters of participants are able to pay off their debt for less than what they owe, according to industry statistics.

When you work with a debt settlement company, you build up money in a savings account with that company and use it to try to reach an agreement (or settlement) with creditors. Companies, also called debt relief companies, may recommend that you stop making regular payments to your creditors to help build the strength of these negotiations.

But how much to pay the bills actually save when considering everything? And how long does it really take? Since each account is negotiated separately over a period of time, it is wise to try to get a picture of the total costs and benefits before signing up for the plan. Let’s get into the numbers.

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Average repayment period: 4 years in total

The time it takes to complete a debt settlement process varies from person to person, depending on several factors:

• How much total credit do you have: Debt settlement companies usually start trying to negotiate a debt settlement once you have saved up about 20% of the balance you owe on a particular debt. Larger debts often take longer to save.

• What type of loan do you accept: If you’re willing to work out a payment plan with your creditor or take out a payday loan, you may be able to pay off your debts faster than waiting for a lump sum offer.

• How many accounts you registered in the program: If you have multiple debts, it will take more time as each debt is negotiated one at a time. The average customer usually registers about seven different bills.

• How active are you in monetizing your program: A credit settlement company will recommend a monthly deposit amount when you sign up for their program. That amount is usually less than the total of your monthly minimum payments. But ultimately you’re in control of making the deposits (and you keep control of the money in the account, too). If you make all these deposits on time, you will see immediate results. If you skip deposits or don’t pay the recommended amount, your progress will be slow.

• How willing are creditors to negotiate a promise to pay: Some lenders are more open to negotiation than others. Few creditors are willing to negotiate at all.

Generally, most debt settlement customers will receive their first debt settlement offer within four or five months. (The best debt settlement companies may be able to deliver quick results, however, which can be critical if it helps motivate you to stay on track with your savings. You should ask debt service companies how long it will take for your payments to begin before you sign up.) From there, the company will work on each of the debts you’ve registered until they’re all paid off or the debtors refuse to negotiate. It takes about four years for most people to reach this point.

Average payout ratio after company fees: 32%

Each lender is different when it comes to their willingness to negotiate with the debt settlement company you hire.

In general, the average settlement offer is half of what you originally owed. After accounting for the debt settlement company, this number drops to a savings rate of 32%.

However, not all debts can be paid. One in four debt settlement customers cannot pay anywhere debts. The explanation for why those customers failed is not publicly reported. Creditors may have refused to come to the table, but they also may not have agreed to the monthly savings plan required to build the sums needed to negotiate.

Average loan repayment amount: $762 per loan

By law, debt settlement companies are not allowed to charge you any fees until you accept the terms of any payment offers they present. That means if you don’t accept any of the compensation they negotiate, you won’t owe any money – at least not to the company itself.

Fortunately, most people do receive and accept more than one payment offer. For each debt, you can expect debt settlement companies to charge between 15% and 25% of the registered debt. In 2022, the average penalty for each successfully discharged debt was $762, which represented 17% of the total settlement amount, according to the Association for Consumer Debt Relief.

You don’t have to worry about coming up with this lump sum payment. Credit card companies will include their own fees when they do the math to get your recommended monthly plan deposit amount. They will then withdraw their payments from your savings account when you give them the thumbs up for any offers they suggest.

Other costs

Debt settlement companies may only charge you one fee – the settlement fee, after you’ve agreed to any offers – but that doesn’t mean it’s the only fee you’ll pay. You should also consider these potential costs:

• Taxes: You may owe income taxes on the amount forgiven.

• Legal fees: Creditors can sue you for default rather than negotiating. If so, you may face legal costs to defend yourself and/or any judgments against you. Some debt service companies partner with legal firms to help with this and include legal fees in their program fees, while others may charge more for this service. Make sure you understand what support, if any, the company you sign up with can provide.

• Liability Damage: Debt settlement almost always requires missed payments, and that default can hurt your credit score. Although it is a temporary decrease, it can make rejection more likely if you apply for new credit elsewhere, or you may have to pay higher interest or other fees if you are approved.

• Late payments and interest: Creditors continue to charge interest on unpaid debts while you’re in the program, and you may face late fees and penalties, too. That causes account balances to grow by an average of $494, or 12% of the original amount, according to the 2021 industry report. This may not add any additional costs if you are unable to access successful compensation. But if there are unpaid accounts, you will have to pay these fees.

• Program savings account fees: You can’t choose the bank where your savings account is held, and most of these partner banks charge a $5 to $10 monthly maintenance fee. If you stick with the plan for four years, as most people do, that’s between $240 and $480 in additional costs.

Average savings after all bills are included: 18%

The actual cost of debt settlement has many moving parts, so let’s use data from the 2021 industry survey to break it down.

A typical debt relief client registered a total of $27,756 and was able to reach an agreement on $17,032 of that debt with creditors. The average payment amount on that amount was $8,365, saving $8,667 in the process, including any interest that accrued on those accounts during the negotiations. That’s a big savings, but you still have to factor in the costs to put it into perspective.

Debt settlement companies themselves charged a fee of $3,225, on average. It took 36 months to settle this pile of debt, which would have meant up to $360 in additional fees from the required savings account.

When the dust settled, the average debt settlement client actually saved $5,082, or 30% off the debt they were able to pay off. But since they weren’t able to pay off all their debts successfully, the actual number of savings was small – only an 18% reduction in all the debt they entered the program with.

This savings rate still does not take into account any interest or penalties that may accrue on the outstanding debt or any taxes paid on the forgiven amount. A middle-income family in 2024 paid a 12% tax rate, which would increase their tax bill by nearly $1,000.

How much can you save by signing up to pay off your bills?

Here’s a look at the numbers for a debt relief client.

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