How do traditional debt settlement companies make money

How do traditional debt settlement companies make money?

Make your money go further as a Resolve member

As a Resolve member you will be able to monitor your credit score, get powerful budgeting tools, debt relief recommendations and much more.

A debt settlement company does exactly what its name implies: It helps you negotiate with your creditors to settle your debt for less than what you owe. Sounds amazing, right? Well, not so fast. You need to understand how traditional debt settlement companies work and, more importantly, how they make money to ensure that their goals align with yours. In order to make the best decision for your financial future, you’ll first need to weigh all the benefits — and risks — of settling your debt.

Debt settlement companies: Mind the fees

Let’s start with the biggest question: How much is this going to cost? Debt settlement companies (sometimes called debt relief companies) don’t work for free. They typically charge a fee of 20% to 25% of your enrolled debt if they’re successful in getting your debt settled for less. (Avoid any companies that try to charge you an upfront fee.) And because they take this fee no matter what — whether they’re able to lower your debt bill by a lot or only a little — their incentives may not match what’s best for you, says Michael Bovee, who’s been working in debt relief for more than 20 years and is the co-founder of Resolve, a company that helps people navigate their way toward financial health. 

“It doesn’t matter how good of a job they do,” Bovee points out. “They could do a very crappy job and still get paid the full fee. And that’s misaligned incentives.” 

Related article: The tricks of debt settlement: 5 sketchy things to watch out for

Many people don’t even bother to ask about fees upfront, says Bovee. The reason: Debt settlement salespeople are more likely to focus your attention on the reasonable monthly payment they’ll be able to secure for you. But the fees can make a good deal look not-so-great very quickly. Another factor: Depending on your situation, filing for Chapter 7 bankruptcy might be a better bet, but a debt settlement rep may not mention that. Why? They only make money if they settle your debt.

Do the math

Now that you know fees are involved, you’ll need to crunch the numbers. This will allow you to decide if working with a debt settlement company makes sense financially. 

Bovee gives an example: Assume you have $20,000 in credit card debt and you’re enrolled in a debt settlement program that lasts 48 months with an agreement to settle your debt at $13,000. You may owe about $4,000 in fees to the debt settlement company and, assuming you’re in a 20% tax bracket, $2,000 in taxes. (The IRS often taxes forgiven debt as income). Now you’re back up to owing $19,000, which means you only saved $1,000 spread out across four years. Which isn’t much.

While everyone’s debt settlement situation will look different, be sure to calculate what your savings will be after every penny is paid, including fees and taxes. In the end, while you’re being sold a “deal,” you may not come out much better than if you had simply focused on diligently paying down the debt yourself or negotiated with your creditors directly. If you choose to work with a debt settlement company, make sure you walk away with a clear understanding of your total costs before signing up.

Debt settlement companies: Read the fine print

Some debt collectors may advise you to stop paying your debts while they negotiate for you to save up a lump sum payment. Be careful — you’ll incur more late fees and interest fees and it may increase the chance of a lawsuit (more on that next), not to mention only increase your total debt balance. Plus, all those missed payments will do a lot of damage to your credit score.

Another risk of settling your debts is being sued for the debts you’re not paying. That’s one thing that Bovee says many clients assume is unlikely to happen to them. “I talked to two people today who were with other companies first,” says Bovee. “They’ll come to me and say, ‘Well, I’ve been with them for eight months, and they settled two of my debts, but now I’m being sued for the third and they can’t help me.’” 

Related article: Help, I’ve been sued by a debt collector!

Bovee says that many debt settlement companies typically start by settling debts with companies that they know are unlikely to sue. They’ll collect their fee for those before moving on to the tougher ones. A tough creditor might sue you and, at that point, the debt settlement company may not be able to help. “If you’re not paying creditors, some of them sue really quickly,” says Bovee. “Others wait. If your fees are 20% to 25% of the debt total, it means a two-year plan is now a three and a half year plan. This increases the likelihood of being sued because it’s taking creditors longer to be paid back.” 

While you may never be sued if you choose to go this route, know the risks and try to do your research on which companies are more likely to sue to weigh if settlement is a smart option. 

Consider other alternatives

This is where Resolve comes in. As Bovee points out, one of his biggest gripes with debt settlement companies is that they’re so laser focused on debt settlement, they may not help you think through other options that are better for your situation. Resolve, on the other hand, wants you to see all your options upfront so you can weigh the pros and cons of multiple solutions. 

Resolve’s technology will look at your full debt profile and sort your debts by priority of who is likely to sue and provide conservative estimates of what you can settle for and even offer tips for how to do it on your own. If you do work with one of their partners to settle your debt, their fee is based on the amount saved, not total enrolled debt, which typically yields lower fees. But more importantly, you’ll be able to weigh different options. 

Related article: How debt settlement works on Resolve

“No one’s really talking to people about everything that’s in front of them — all the risks, benefits and rewards of any of their debt relief options,” says Bovee. “Debt settlement guys don’t make any money off bankruptcies. Bankruptcy guys aren’t really interested in encouraging people to bootstrap and pay their debts back in a debt management plan, or a Dave Ramsey-esque debt snowball. Resolve is built to be that resource, and give people the information to make that choice.” 

Bottom line: Before opting for debt settlement, make sure you’ve exhausted all other possibilities.

How Resolve can help

Whether you’re considering debt settlement, debt management or even bankruptcy, we can help you understand what each of these options means for your personal financial situation and how you can get back on track, all while knowing your best interests are top of mind for the financial experts helping you.

Your first step is to complete your profile here. We’re also happy to speak with you to discuss your situation further. Just send us a message.

Share on facebook
Share on twitter
Share on linkedin

Monitor your credit score for free

Improving your credit score unlocks a number of doors for you. We keep a pulse on your credit score for you.

Share. Learn. Connect.

Join our Facebook Group. It’s a safe place to share ideas, ask our debt experts questions and support each other.

Make your money go further as a Resolve member​​

As a Resolve member you will be able monitor your credit score, get powerful budgeting tools, debt relief recommendations and much more.

We use bank-level security with 2048-bit SSL encryption and will never share your info without your consent


Resolve is an accredited company with the Better Business Bureau​


We were selected as a winner of the prestigious CFSI Financial Solutions Lab by J.P. Morgan Chase

Copyright © 2020 Resolve Innovations, Inc., a Public Benefit Corporation. All rights reserved.