Credit card debtJennifer Jones was $80,000 in debt and unable to get out from under it. Excessive spending and being out of work several times over the past 15 years was her downfall.

"I was keeping up with minimum payments, then the bottom fell out, and I couldn't keep up," says Jones (not her real name). She turned to debt-settlement firm Consumer Recovery Network. Now less than a year later, she's "debt free and free," says Jones. CRN settled her debt for just under $40,000. But just as important, "I received a training program that taught me about debt and how creditors behave. I also learned how to negotiate with creditors on my own," says a somber Jones. "I won't fall in the credit trap again. I'm careful about my spending."

Jones's story has taken a happy turn, but plenty of people have tales of another sort to tell. Americans are reeling from debt: Bankruptcy filings for 2010 through early September are running about 12% higher than the first eight months of last year, according to the National Bankruptcy Research Center. And that's creating a slew of firms offering debt relief, some of which can make things worse.

In response, over the past decade, the Federal Trade Commission and state enforcers have brought more than 250 cases to stop deceptive and abusive practices by debt-relief providers that have targeted consumers in financial distress. On Sept. 27, the FTC's Telemarketing Sales Rules will take effect requiring these companies to make specific disclosures to consumers and prohibit them from making misrepresentations. The rules will be extended to cover calls consumers make to these firms in response to debt-relief ads. On Oct. 27, the FTC goes further still, banning the practice of taking advance fees to arrange settlements.

Only in It for the Money

William Caniano used to work with a debt-settlement company and discusses the practice, among other topics, in his forthcoming book, The Art of Bullspit and The Casino Economy. "Many of the people I worked with were at best disingenuous. They painted a rosy picture for the client that really sounded doable. The consultant only wanted to get the client into the program long enough to collect their commission, which is paid from the first one to three months' installments. After that, neither the company or the consultant gave a damn whether or not the client stays with the program," says Caniano.

Furthermore, he says: "Unless asked specifically, the consultant will not reveal in clear language that the client's credit will be shot. Truthfully, most of the time people are better off filing bankruptcy. Their credit will recover sooner, and in many cases they will shed their entire debt."

"It is difficult to recognize the good companies from the bad," says Joan Feeney, a U.S. bankruptcy judge in Boston, "and the bad ones may be predators who are solely looking to take your money when you are most vulnerable."

Some Questions to Ask


Still, debt settlement can be the last hope -- and it can work -- for people who are hopelessly behind on payments with no expectation to pay down their debt, says Ken Lin, CEO of Credit Karma, which offers free credit scores and reports.

If you decide to go there, Michael Bovee, founder of Consumer Recovery Network and vocal advocate for industry reform, offers advice. Look for a debt-settlement company that's been in business at least three years, has a clean record with the Better Business Bureau and will provide you with a good-faith estimate in writing.

Ask tough questions. Bovee makes a few suggestions: Will the firm send a cease communication or limited power of attorney immediately to your creditors? If you hire the firm, will it recommend that you no longer speak to any of your creditors once you begin working with it? Will you be charged a fee if one of your creditors contacts you directly and you accept a settlement offer?

Other Strategies

Debt settlement, though, is far from the only game in town. You can also accomplish a lot on your own. "Stop using credit completely," advises Kevin Gallegos, vice president of Freedom Debt Relief. "Pay secured debt, such as a mortgage or vehicle loan first. Pay as much as possible on the debt that has the highest interest rate, while staying current with other debts by making minimum payments. When the first debt is repaid, use the same strategy on the next highest-rate debt. Continue until all debt is paid off."

This strategy will protect your credit score, and you shouldn't accrue additional fees beyond interest on existing balances. However, it requires discipline to make payments on time and to stick to your plan to not use credit. If you can't make minimum payments, try negotiating directly with your lenders to lower your interest rate and your balance. "It's often in the creditors' interest to negotiate, since it makes payoff more likely," says Gallegos.

Nonprofit credit-counseling organizations are another alternative. Look for one that's associated with the National Foundation for Credit Counseling (www.debtadvice.org), says Matt Bell, author of Money Strategies for Tough Times. Then check with the Better Business Bureau to make sure it has no complaints. Get all fee information up-front and in writing. A one-time set-up fee of about $50 and ongoing fees of around $35 are reasonable, he adds.

Typically, you'll send one monthly check to the agency,which will then make payments to creditors. Credit counselors can't negotiate down balances, but they can negotiate down interest rates and may be able to get late-payment and other fees wiped out, says Bell.

Bankruptcy: The Last Resort


Debt consolidation is another approach: You combine multiple debts into one larger loan. "This might work for people who are able to pay their bills but find it difficult to juggle multiple bills and payments. It's most advantageous when the debt-consolidation offer includes a lower interest rate than most of the rates you were paying," explains Gallegos. One downside: The new loan is usually secured by the borrower's property, such as a home or car, which puts those items at risk if you can't pay.

The last resort is bankruptcy, which hurts your credit rating more than any other form of debt relief, usually for seven to 10 years. "This is best for people who cannot repay their debt and who either don't have a home or don't wish to keep their home when they resolve their debt situation," says Gallegos.

Ignoring the severity of the situation won't make it go away. You have to take action to get back on firmer financial ground.

Live for the Future

Better still, avoid debt in the first place. Don't "wing it" when it comes to your finances. Have a plan and a realistic budget in place -- and stick to it. If you can't pay off your essentials each month, rethink your spending. Purchase only what's necessary and have a financial plan for rare splurges. "If you don't have this level of control, stay away from credit cards and stick to debit and prepaid credit cards," advises Credit Karma's Lin.

Expect the unexpected. "Start your savings cushion," says Clarky Davis, the Debt Diva for CareOne Services. Work toward stashing a mininum of three to six months' of expenses into an accessible account. Lastly, says June Walbert, a certified financial planner with USAA: "Don't forsake your future for a fabulous lifestyle today."

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