But when you hear about a program that promises to significantly reduce your credit card debt, you wonder: Do these debt-relief services really work?
Debt-settlement companies typically try to negotiate with credit card companies to reduce the amount you owe. Rising unemployment has led to a sharp increase in the number of consumers who are behind on their payments, creating a receptive audience for their services. But like a weight-loss product that causes you to gain 10 pounds, some of these programs could leave you even deeper in debt.
Federal and state regulators have brought a number of actions against debt-relief companies for misleading and deceptive practices.
Last week, Chase Card Services, a division of JPMorgan Chase, said it will forgive the debts of more than 13,000 credit card holders who were allegedly defrauded by a Florida-based group of debt-settlement companies.
The settlement stemmed from a lawsuit brought by Florida Attorney General Bill McCollum against the companies. The lawsuit alleged that customers were told to stop sending monthly payments to their credit card companies and send the money instead to the debt-settlement firm, which promised to reduce debts to pennies on the dollar. Instead of sending the money to credit card companies, the lawsuit alleged, the group used it to pay attorneys' and processing fees.
For some borrowers with large debts that can't be repaid within three to five years, a reputable debt settlement company may offer an alternative to bankruptcy, says Gerri Detweiler, credit adviser for Credit.com, a consumer site. Legislation enacted in 2005 has made it more difficult for some individuals to file for Chapter 7 bankruptcy, which eliminates most debts. Chapter 13 bankruptcy requires you to agree to make up to five years of court-ordered payments, and you may be required to surrender some assets.
Still, bankruptcy offers more legal protection than debt settlement: While you're filing for bankruptcy, your creditors can't file lawsuits or harass you. "I would never suggest someone go into debt settlement unless they've met with an attorney, and the attorney concurs that bankruptcy may not be the best option," Detweiler says.
If you decide to pursue debt settlement, watch out for red flags. Warning signs:
•The company charges a large upfront fee. Many of the debt-relief companies targeted by federal and state regulators demanded thousands of dollars in fees and never delivered on promises. If a company gets most of its payment upfront, Detweiler says, "They don't have much incentive to do a good job for you." Ideally, fees should be tied to results.
•The company claims that debt settlement won't affect your credit report. Not true. While successful debt settlement will reduce the amount you owe, "Your credit will be significantly damaged," Detweiler says. "If you're weighing bankruptcy vs. debt settlement from a credit report standpoint, there's not much difference."
•The company claims it can protect you from lawsuits. "While creditors do settle debts every day, it's an adversarial process," Detweiler says. "You could be sued."
•The company claims it can eliminate all of your debts. These companies provide, for a fee, a document that purports to absolve the consumer from credit card debts because the original line of credit was illegal. Consumers who fall for this scam end up with higher debts, ruined credit and calls from a collection agency.
There are low-cost alternatives to debt settlement. Call your lenders and see if they're willing to negotiate with you directly.
Another option is a non-profit credit counseling agency, says Chuck Bell, programs director for Consumers Union. A credit counselor may be able to negotiate a debt-management plan with your lenders that allows you to repay your debt over time, sometimes at a lower interest rate.
You can find a credit counselor in your area at www.debtadvice.org, the website for the National Foundation for Credit Counseling, or www.aiccca.org, the website for the Association of Independent Consumer Credit Counseling Agencies.
Ideally, Bell says, "You're going to get an independent source of advice, not somebody who is going to profit from your misfortune."
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