How Much Does Debt Relief Cost?

Debt relief costs vary widely depending on the method—debt payoff apps are often free or inexpensive, while debt settlement and bankruptcy can cost thousands of dollars in fees.

Luckily, there are many ways to get out of debt. We’ll go over the costs for five popular debt relief options: debt settlement, credit counseling, debt consolidation, debt payoff apps, and bankruptcy.

Costs of Debt Settlement

Debt settlement companies are usually the first results to pop up in Google if you search for debt relief. These companies seem to have large marketing budgets and plenty of allure. Who wouldn’t want to settle their debt for less than they owed, especially considering there are no upfront fees?

Unfortunately, the costs of debt settlement aren’t always obvious. These companies require you to stop paying your debts entirely, instead paying into a third-party savings account. They’ll use this money as a bargaining chip to negotiate a lump-sum settlement payment for less than you owe—but this means you’ll end up defaulting on your debt. As you might expect, this can be very costly in the long run.

Debt settlement companies start with a free consultation to go over your financial situation and your credit. This gives you a chance to learn about the company and what it can do for you, but don’t be surprised if the representative tries to sell you on the service.

Now, let’s consider the direct fees for debt settlement:

• Settlement fees: These fees range from 14% to 30% of your debt, but they’re only paid on debts that the company successfully negotiates. Some debt settlement companies base this fee on the amount of settled debt, while others base it on the amount of enrolled debt (again, only concerning accounts that are settled; if the company can’t negotiate one of your debts, you wouldn’t pay fees for that debt).
• Monthly account fees: You may be charged a setup and/or monthly fee for the third-party savings account that debt settlement companies require you to use to build up your lump sum payment.

More importantly, the indirect costs of debt settlement include:

• Income taxes: You’ll generally be required to pay taxes on the amount of debt your creditors forgive when you file your taxes at the end of the year. Depending on your tax bracket, that could amount to 10% to 37% (in 2024) of the amount that your creditors forgave.
• Credit damage: Creditors will report late payments, defaults, collections, and debt settlements on your credit reports, which can cause serious damage to your credit. A closed, delinquent account will generally stay on your credit reports for seven years.
• Late payment fees: Creditors will charge late payment fees, which can cause the amount you owe to increase while you’re not making payments on your debt. These fees add to your balance and can be included in settlements, but if the debt settlement company isn’t successful, you’ll owe all those extra fees too.
• Unsuccessful debt settlement: Although old, one 2007 Federal Trade Commission analysis found that only about half of people successfully completed a debt settlement program. People who don’t complete the program can end up with worse credit and in more debt than they started with.

Costs of Credit Counseling

Credit counseling is a broad term that refers to any support you get from a dedicated credit counseling organization, most of which are nonprofit. These organizations assign a counselor to work with you one-on-one, going over your financial situation and debt profile. They can help you decide on the best way to alleviate your debt burden—including secured debt such as mortgages and student loans—and may even contact your creditors on your behalf.

Credit counseling agencies also offer debt management plans (DMPs), working with your creditors to modify your debts so they’re more affordable (these plans may only be available for unsecured debts). The agency may be able to negotiate lower interest rates and/or lower monthly payments for debts in the DMP. You’ll send in one monthly payment to the agency until all of the debts included in the DMP are paid off in full, which typically takes three to five years.

Most services provided by credit counselors are free (including your initial consultation), unless you sign up for a debt management plan. Fees for a DMP may be based on the customer’s income. Here are the associated costs of the major players in the industry, according to Investopedia research:

• Debt management plan setup fee: $0 to $99
• Debt management plan monthly fee: $0 to $75

You typically need to close any credit cards you enroll in a DMP. And, although credit counseling and debt management plans don’t have a negative effect on your credit score themselves, canceling your credit cards may bring your score down. Your credit reports may also show accounts in DMPs, and lenders can see that information.

Costs of Debt Consolidation/Refinance

Consolidating your debt can be a good option if you have a decent handle on your finances already, and you’re just looking to save some money or get a more manageable payment. You can consolidate multiple accounts into a single monthly payment, or just refinance a single debt account.

Debt consolidation usually takes two forms: taking out a personal loan for a lower interest rate and/or a different term length, or opening a new 0% APR balance transfer credit card featuring a months-long interest-free runway to help you get ahead of your debt.

If you get a lower rate, you can save money over time. If you get a longer repayment period, you may get some breathing room with a lower monthly payment—but this can make the debt more expensive overall.

Here are the costs you can expect to pay for a personal loan:

• Loan interest: Loans charge interest from the start, albeit at a lower overall rate on average than credit cards (unless you get a 0% APR credit card).
• Origination fees: Loans often come with origination fees ranging from 1% to 6% or more, especially if you don’t have good or excellent credit.

And here are the main costs for a balance transfer credit card:

• Annual fees: Balance transfer cards may come with annual fees, which are sometimes waived in the first year. The best cards don’t charge such a fee, however.
• Balance transfer fees: Most balance transfer cards charge a balance transfer fee, typically ranging from 3% to 5% of the transfer amount.
• Credit card interest: A 0% APR balance transfer card will start charging interest at the end of the 0% intro period, giving you a good incentive to pay down as much as you can during the interim. It’s also possible to lose your 0% rate if you miss a payment. And, if you make any purchases with the card, that spending will accrue interest at the purchase APR (which may or may not be 0%).

The cost for you depends on your personal credit and the overall interest rate environment to a large extent. If you’re in a low-interest-rate environment and you have excellent credit already, you’ll likely qualify for very inexpensive loans and credit cards. If you have bad credit and/or rates are high all around, it may be hard to find options for less than you’re already paying. 

Costs of Debt Payoff Apps

Anyone can use debt payoff apps to help manage or get ahead on their debt, even if they’re not currently struggling. There are many types of apps and they work differently. Two popular types are debt planners and round-up apps.

Debt payoff planners help you calculate the best way to pay down your debt (such as with the debt avalanche or debt snowball method), while round-up apps link up with your debit or credit cards to round up each purchase you make to the nearest dollar. That difference gets saved up and periodically sent to your lender as an extra payment to help you make quicker debt payoff progress.

Here are a few examples of debt payoff apps, along with their costs.