In Part 1 of our discussion on the fees that credit card settlement providers can charge for their services, we reviewed the pertinent FTC laws and looked at an example of how these laws affect the payment of debt settlement fees. (If you haven't read Part 1, I suggest that you start there as I will be referring back to that information as we continue the discussion below.)
Alright, so we know from Part 1 that debt negotiators cannot charge you up-front fees for their services, and that they cannot collect any fees until three specific requirements have been met. Namely:
1. the company must actually negotiate a settlement with your creditor
2. you must accept that settlement and sign off on it, and
3. you must actually make the payment to the creditor.
Once these three requirements of the credit card settlement process have been met, the company or individual who is negotiating on your behalf can collect their fee. This is fairly straight forward, but there are still some questions that arise that need addressing.
At this point there are no laws that require debt negotiators to calculate their fees in a specific manor. However, you will find that most companies calculate their fees based on one of two methods.
The first method, and by far the most commonly used method, is to charge a fee that equals a percentage of the total debt that is being enrolled in the program. Typically the percentage ranges from 15% to 25%. Now, although there are no laws that restrict these percentages, the new FTC laws do restrict how these percentage must be applied to both the individual debts and overall debt amount that a consumer enrolls in a credit card settlement program. Let me explain this further by looking at an example.
Let's start by assuming that you sign up for a debt settlement program and enroll three unsecured debts, each worth $2,000. Let's also assume that the fee you will be charged is 20%, which in dollars will amount to $1,200 once all three debts are settled. ($6,000 X 20% = $1,200) Based on this example, I'll point out two things pertaining to these fees that are restricted by the new laws.
First, if the settlement company is basing their fee on the amount of your debts when you enter their program, they must continue to use these original debt amounts when calculating fees down the road, even if the amount of those debts increases during the process. It's important to keep in mind that interest, fees and penalties will continue to accumulate on your debts while you are waiting to reach a settlement. And by the time a debt is settled, you may actually owe significantly more than you did when you entered the program. Those $2,000 debts may have increased to $2,200 by the time you are six months into the process. Regardless of this you will still only owe 20% of the original debt amount ($400), not 20% of the amount of the debt at the time of the actual settlement($440).
Second, the percentage that is charged by the credit card settlement company must be the same for each of the debts that you enroll. In other words, if you enrolled three separate debts (as in our example), you cannot be charged 50% on the first debt that is settled, and 5% the second and third debts. Although the overall fee would be the same ($1,200) the timing of when the fees are paid would vary significantly from what the law allows. This restriction is in place so that companies cannot front load their fees by charging a huge percentage on the first debt that is settled and less on subsequent debts. In our example, if one of the debts were to be settled six months in to the program, the company could only collect $400 (20% X $2,000) after the settlement is agreed upon and paid.
The second method that is used by credit card settlement companies to calculate fees is the percentage of savings model. Under this model, companies charge a fee based upon the percentage of the amount that they save the customer. For example, a debt negotiation company might charge you a fee equal to 25% of the amount they save you. Using the numbers from our above example, (three debts, each worth $2,000), if one of those debts was settled for $800, the amount saved would be $1,200, and hence the fee owed would be $300 (25% X $1,200 = $300). Again, even if the debt amount has increased to say $2,200 by the time it is settled, the discount is still based on the original amount of the loan ($2,000), not the new amount.
Keep these laws in mind when you are negotiating fee structures with a credit card settlement company. Having an overall idea of the laws surrounding debt negotiation fees will save you from nasty surprises in the future.