Can companies help kill your debt?

February 4, 2009 5:56:15 PM PST
Americans are buried under more than $900 billion in credit card debt.There are plenty of companies advertising they can work with creditors to reduce the money you owe.

Single mom Marissa Ruiz supports her kids on a social worker's salary. When she found herself struggling with more than $10,000 worth of credit card debt, she turned to a debt settlement company for help.

"They gave examples where, if you owed a certain amount of money, they could cut it basically in half," said Ruiz.

After five months, she had handed over more than $600 in fees, but her debt hadn't been reduced at all.

"My creditors were getting more and more unhappy, harassing me more, threatening to garnish my check, and the whole process was getting worse instead of better," Ruiz said.

Consumer Reports' Bob Tiernan says some debt settlement companies promise to help, but can land people in even bigger trouble.

"A lot of the time, the company will tell you to stop paying your bills to build up some savings. But this makes your original debt grow as you miss payments and get hit with penalty fees and finance charges," he said.

And that's not all. You'll also owe the company itself.

"Typically, these debt reduction companies charge 15% of your total debt as an upfront fee, plus 20% if they reach a settlement," Tiernan said.

Consumer Reports says a better option is to contact your creditors directly.

"It's possible to negotiate down the debt that you owe to a fraction of what it was before. In fact, bank officials that we talked to said they don't give any better deals to the debt companies than they do to individuals that call them up personally," Tiernan said.

Another option is to go to debtadvice.org and look for a certified non-profit credit counselor through the National Foundation for Credit Counseling. These counselors will help you either for free or for a set fee. Ruiz ultimately did just this and in a year's time, managed to reduce her debt by nearly $10,000.

Consumer Reports says that in this bad economy, it expects unscrupulous debt-settlement companies to flourish. A good rule of thumb, no matter what type of financial crisis you're dealing with, if the deal sounds too good to be true, it probably is.

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