Debt Settlement Arrangement Fees

3rd June 2014

Why Are There Fees For Debt Settlement Arrangements?

The only way to set up a DSA is via a PIP (personal insolvency practitioner). These debt professionals work for private businesses and do not receive any kind of public funding to assist people that are in debt. They must therefore charge fees to cover the cost of the work that they do.

Setting up and managing a debt settlement arrangement involves a significant workload. Your financial situation is reviewed fully, advice is presented to you, proposals are created for creditors and negotiation then takes place. If the DSA is agreed the PIP will then be responsible for administering the arrangement for a period of years.

Because of the significant workload, because PIPs are tightly regulated, and because they’re highly qualified, these types of debt deals do tend to be accompanied by significant fees.

How Are Relatively High Fees Affordable If You Have Large Debts?

The fees levied for setting up and administering a DSA fall into two possible categories. You might be asked to pay some kind of upfront fee. This is a fee charged for the work that a PIP is doing before your creditors have had the opportunity to accept (or reject) your proposals.

Sometimes a potential user of a debt settlement arrangement will have supportive family that can pay this upfront fee for them. Others might have to carefully save up such a fee, perhaps by reducing the repayments they’re making on their existing unsecured non-priority debts.

Mostly the fees and costs associated with debt settlement arrangements will relate to the period after creditors have accepted such a deal (the second category of fees). The fees are now funded in a different fashion. You may your agreed payments into the DSA. This builds up a pool of funds. The pool of funds is used in two ways. Firstly your personal insolvency practitioner will draw their fees from it. Secondly the remaining funds will eventually be distributed to your creditors.

You’re paying in what you can reasonably afford to. You aren’t being asked to find extra money to cover the fees in excess of this agreed affordable contribution.

So Who Really Pays For A DSA?

Setting aside the subject of upfront fees, you can look at this question in two different ways.

If you decide to go ahead with a debt settlement arrangement you’ll appoint a personal insolvency practitioner to act for you and agree to their fees. You’ll then pay what you can afford into the DSA and your PIP will take their fees from the money that you have paid in. They’re taking fees that you have agreed to from money that you have paid over. As such, it seems very much as though you’re paying for their work.

Creditors (typically the banks) might see this from a different perspective. They’re asked to accept your DSA which will normally result in them writing off some of the money that you owe to them. As part of this decision they will take into account how much your PIP intends to charge for their part in the process. If the fees seem too high they might reject the proposals.

Eventually your creditors will receive some money back towards your debts. The amount that they receive will depend upon how much you have paid in and how much the PIP has taken in fees. Because the PIP’s fees directly reduce how much they are repaid, your creditors could conclude that actually they’re bearing the costs.  

Must You Pay Upfront Fees?

At the current time many PIPs are charging upfront fees when appointed by a client to set up a debt settlement arrangement.

The process remains quite new and there is little common understanding yet as to what creditors will (and will not) accept. If a DSA is rejected by the creditors the PIP might have done a lot of work for which they will not be paid at all.

The good news is that work is taking place on a personal insolvency protocol. If an effective understanding is reached PIPs will be much more confident about which cases are likely to be accepted by creditors. When this occurs we feel that it’s likely that more will be prepared to take on a client appointment without charging an upfront fee.