It depends. With a percentage of enrolled debt vs. percentage of savings, a savings fee will often be cheaper when discounts are smaller, and an enrolled debt fee will often be cheaper when discounts are larger. When the quotes are 20% of enrolled debt vs. 35% of savings, the fees are the same at a 57% discount.
How do percentage of enrolled debt and percentage of savings fees work?
Debt settlement companies charge a fee in two basic ways. The first is a percentage of the enrolled debt, fixed regardless of how much you save. The Telemarketing Sales Rule (TSR), 16 CFR 310.4(a)(5)(i)(C), describes it as a fee proportional to each debt's share of the total enrolled balance. The other is a percentage of the amount saved, meaning "the difference between the amount owed at the time the debt was enrolled in the service and the amount actually paid to satisfy the debt."
When the FTC amended the TSR in 2010, it described the first as a "flat fee structure" and the second as a "contingency fee structure" (75 Fed. Reg. 48458, Aug. 10, 2010), and said the rule "places no restriction on the amount of fees that providers can charge."
At What Discount Are a Percentage of Enrolled Debt and a Percentage of Savings the Same?
The two are the same when your discount equals the percentage of enrolled debt divided by the percentage of savings. At 20% of enrolled debt vs. 35% of savings, they are the same at a 57% discount (0.20/0.35). Settle deeper and the enrolled debt fee is cheaper; settle shallower and the savings fee is. At 15% vs. 25% they meet at 60%, and at 20% vs. 25% at 80%.
Here is 20% of enrolled debt vs. 35% of savings on a hypothetical $100,000 file.
| Amount Paid to Funders | Amount Saved | Fee as 20% of Enrolled Debt | Amount Saved After Fees | Fee as 35% of Savings | Amount Saved After Fees |
|---|
| $30,000 | $70,000 | $20,000 | $50,000 | $24,500 | $45,500 |
| $40,000 | $60,000 | $20,000 | $40,000 | $21,000 | $39,000 |
| $50,000 | $50,000 | $20,000 | $30,000 | $17,500 | $32,500 |
| $60,000 | $40,000 | $20,000 | $20,000 | $14,000 | $26,000 |
| $70,000 | $30,000 | $20,000 | $10,000 | $10,500 | $19,500 |
| $80,000 | $20,000 | $20,000 | $0 | $7,000 | $13,000 |
Most comparisons stop at 50% (the third row), where the savings fee is $2,500 cheaper. At a 60% discount (the second row), the enrolled debt fee is $1,000 cheaper, and at a 70% discount (the first row), it is $4,500 cheaper. For more, see what the MCA settlement company is going to charge and what is included in its fee.
Can the Debt Settlement Company's Fee Be Greater than the Amount Saved?
A savings fee can never exceed the amount saved (if the percentage is under 100% and the savings figure is accurate), but an enrolled debt fee can be greater than the amount saved. Divide the enrolled debt percentage by the discount to see the company's share of your savings. At a 20% fee, that is 29% of your savings at a 70% discount, 40% at 50%, 67% at 30%, and 100% at 20%. On a $100,000 file at a 25% fee and a 20% discount, you pay $25,000 in fees to save $20,000, a net loss to you (not counting taxes).
What Happens to the Debt Settlement Company's Fee if One of the Funders Doesn't Settle?
Under the TSR's proportional method, the company could not charge a fee on a funder that doesn't settle, but a contract can charge on every funder anyway. Say you enroll funders at $40,000, $35,000, and $25,000, the first two settle at 50%, and the third sues. A proportional fee would be $15,000 (20% x $75,000). Billing 20% of everything enrolled is $20,000 (20% x $100,000), and 35% of savings is only $13,125 (35% x $37,500).
Savings measured from what number?
A merchant cash advance offers several starting points. Say you received a hypothetical $100,000 at a factor rate of 1.4 (purchased for $140,000) and remitted $60,000, so the balance is $80,000 when you enroll. After default the funder claims $105,000, and the debt settles for $60,000. Is the savings $20,000 (from the $80,000 you owed at enrollment), making a 35% fee $7,000? Or $45,000 off the funder's claim, making it $15,750? The TSR chose the amount owed when you enrolled the debt (before any interest or creditor fees) as the base, and requires the same percentage on all debts, so the fees can't be front loaded.
What does each fee model reward the provider for?
With an enrolled debt fee, the company is paid for closing, and its revenue is set once the debt settles, however good the deal is. FDR, a large enrolled-fee provider, told the FTC that when fees are based on settlement activity, "the debt settlement services provider has an incentive to complete settlements with the creditor and on the account that creates the most revenue."
A savings fee grows with the cut, so the company has an incentive to squeeze, but also to pad the starting number or hold out while you hold the bag with the suit. Neither model as typically written pays for a dismissed suit, a terminated UCC-1, a released guarantee, or an extension without a discount.
Do the FTC's Rules on Debt Settlement Fees Apply to Businesses?
In most cases, no. Business telemarketing calls are exempt from most of the rule except the misrepresentation provisions (16 CFR 310.6(b)(7)), and state rules built on the same models, such as Utah Code 13-42-123 and Delaware's 18% cap in 6 Del. C. § 2423A, apply only to an individual's debts. On an MCA program, the contract should require the enrollment date balance, the same percentage for all debts, and no fee on debts that were not settled. For when fees can be charged, see whether business debt settlement companies charge upfront fees.
Frequently Asked Questions
Is a percentage of savings fee always cheaper?
No. At 20% of enrolled debt and 35% of savings, past about a 57% discount the enrolled debt fee is less. Settling a $100,000 file for $30,000, the enrolled debt fee saves you $4,500.
How do I compare the two fee models if I get two quotes?
Pick 2 or 3 payoff levels you think you can settle for (40%, 50%, 60% of the debt) and calculate each company's fee in dollars at each level. Add any monthly or custodial fees charged on top.
Does the savings percentage have to be the same for every funder?
Under the TSR, the percentage cannot change from one debt to another. A business contract isn't automatically bound by that rule, so ask for the same language in writing.