What a settlement program would cost you
Settlement is sold on what you save. This prices what you pay: the settlements, the fees, the tax on forgiven debt, and what the same money would do if you sent it straight to the cards instead.
A worked example
Take $30,000 of card debt at 24% APR, with $900 a month available to put toward it.
Suppose the creditors settle for 40% to 50% of the balance, the company charges 20% of the enrolled debt, and your tax rate is 22%.
Settlement program
- Paid to creditors
- $12,000 to $15,000
- Company fees
- $6,000
- Tax on forgiven debt
- $3,300 to $3,960
- Total cost
- $21,960 to $24,300
- Time to fund
- 20 to 24 months
Paying $900 to the cards
- Paid off in
- 4 yr 8 mo
- Interest
- $19,933
- Total paid
- $49,933
On dollars alone, the program costs less here. That is common when rates are high and the monthly amount only just clears the interest.
The dollars are not the whole price. The next two sections cover what this total leaves out.
These figures come from the same math as the calculator above, so the two always agree.
How this calculator works
You enter your debt, its APR, what you can pay each month, a range of settlement outcomes, the company’s fee, and your tax rate.
For each end of the range it adds the settlements, the fees, and the tax on the forgiven amount. Then it counts the months your monthly amount takes to fund that total.
Next it runs the other path. The same monthly amount goes straight to the cards at their APR until they are paid off.
If the cards cost less than even the best settlement outcome, it says so. If they land inside the range, it tells you the result depends on what your creditors accept.
It prices settlements against the balance you enroll. In practice interest and late fees keep growing that balance during the months you save, and creditors settle on what you owe at the time. Real settlements can run higher than this estimate.
What the total leaves out
Most programs have you stop paying the cards and save into a separate account instead. Missed payments go on your credit report, and late fees and interest keep adding up.
Creditors do not have to settle. Some sue instead, and a court judgment can lead to wage garnishment or a bank levy in many states.
Forgiven debt is usually taxable. A creditor that cancels $600 or more has to report it to the IRS on Form 1099-C. If your debts were larger than your assets at the time, you are insolvent, and you can exclude some or all of it using Form 982.
Federal rules protect you on fees. Under the FTC’s Telemarketing Sales Rule, a company that sells debt relief by phone cannot charge you until it settles at least one debt and you make at least one payment under that agreement.
Questions people ask about debt settlement
- How much do creditors usually settle for?
- Nobody can promise a number. It depends on the creditor, how far behind the account is, and whether the debt has been sold to a collector. That is why this calculator asks for a range and prices both ends of it.
- How much does debt settlement hurt my credit?
- Heavily at first. The missed payments that come before a settlement do the most damage, and settled accounts show as paid for less than the full balance. Late payments stay on a credit report for seven years.
- Is the fee charged on what I owe or what I save?
- Most companies charge a share of the debt you enroll, commonly 15% to 25%. A fee based on enrolled debt costs the same whether the settlements are good or bad, so compare it in dollars.
- Can I settle my debts myself?
- Yes. You can call a creditor, ask for a lump-sum or payment settlement, and get the agreement in writing before you pay. You skip the company fee. The credit damage and the tax on forgiven debt are the same.
- What else should I compare settlement against?
- A consolidation loan if your credit still qualifies for a lower rate, and bankruptcy if the debt is far beyond what you can repay. For the first, try theconsolidation loan calculator.