There are a lot of companies trying to make money off of people in debt trouble.  You should always approach these companies very cautiously.  Ask a lot of questions before signing up and make sure you understand what the company is offering and whether these services are likely to help you.

These companies know that consumers are in debt trouble and often feel desperate. They make outrageous claims about supposedly magic solutions to debt problems. These claims are designed to pressure you to buy services that can be very expensive and will often get you deeper into trouble.  The truth is that the road to financial recovery usually takes time and is almost never easy.  Try to keep this in mind as you sort through the claims of debt relief companies. 

Debt Settlement.  Unlike credit counseling agencies, most debt settlement and debt negotiation agencies are for-profit businesses.  Negotiation and settlement services are different from debt management services mainly because the debt settlement agencies do not send regular monthly payments to creditors.  Instead, these agencies generally maintain your funds in separate accounts, holding your money until the agency believes it can settle your debts for less than the fill amount owed. 

Here’s how a typical debt settlement deal works.  You go to the settlement agency because you are behind on credit card debt.  In some cases, they will tell you to come back if you’re not far enough behind on your debts.  In some cases, they will offer to sell you services right away.

The agencies have different ways of doing business, but nearly all of them will require you to set money aside each month.  Sometimes the settlement agency will set up an account for you.  In other cases, they will ask you to show proof that you set up your own account.  They will almost always figure a way to take their fees directly from these accounts.

They will require you to deposit a certain amount of money in the account each month.  This is intended to build up a fund that can be later used to try and settle your debts.  In the meantime, you will not be making any payments on your debts.  This means that you could be sued for collection or could be facing pressure from the debt collectors to pay.  Some debt settlement agencies will tell you most of their employees or “counselors” are not attorneys and cannot help you if you get into trouble that requires legal assistance. 

The companies usually claim that they will stay in contact with your creditors while you are depositing money into your account.  They claim they will monitor the account and will let you know when they think there is enough money to try to make a settlement.  If they are able to work out a settlement with your creditor, they will almost always take a percentage of what you save as a fee.  This fee is in addition to the fees they charge you to start the service and the monthly fees they usually take from your account.

A debt settlement agency is also not likely to be of much help if you have a lot of debts. These agencies will generally try to settle your debts, if they do this at all, one at a time.  If you have a lot of debts, this could be a very long process.  In the meantime, you will not be paying all of your other creditors.  This means that those creditors could sue you or keep trying to collect from you in other ways.  And the interest is still growing on your debts.  Also, even if one debt is settled, your credit report will still show that you are in default on your other debts.

If you have just one or maybe two debts and have the money to try to settle those debts, it is best to try negotiating on your own or finding an agency that is willing to help you without charging you high fees and without requiring you to pay them up-front.

You should contact your state consumer protection or licensing agency to find out whether debt settlement is legal in your state and if so, whether there are rules about how much these agencies can charge and about information they must give you before signing up.

Below are five very important points to understand about debt settlement:

  1. Most debt settlement companies charge regardless of whether they ever settle your debts.
  2. Debt settlement services don’t provide instant relief.
  3. Debt settlement services can be very expensive.
  4. Claims for success rates can be very misleading.
  5. Debt settlement programs don’t stop debt collection.

Debt Termination or Elimination.  “Debt Termination” or “debt elimination” companies claim to be able to eliminate your debt usually through the use of special prepared documents.  The documents include fake financial papers that claim to eliminate your debt obligations.  Some of the documents question the legitimacy of government agencies such as the Federal Reserve Board or even the U.S. currency itself.  The documents have difference titles, including, “Declaration of Voidance”, “bond for Discharge of Debt”, and “Redemption Certificate.” Some claim to wipe out mortgage debt rather that credit card debt.  In some cases, the agencies will send a series of letters to your creditors to try to get the creditor to set an arbitration hearing.  The companies will claim that the bank will be unable to prove that you owe the money and so your debt can be cancelled.  The Federal Reserve Board and other financial agencies have announces that these schemes are complete frauds.  Do not be fooled by their outrageous claims.

Source: National Consumer Law Center: Surviving Debt, pp. 69-71