dollar cut in half - debt settlement companiesDebt settlement companies can be very useful tools when it comes to reining in an out-of-control debt spiral. Unfortunately, a number of individuals, some criminal and unethical, others just inept and inefficient, have set up companies that end up making a consumer's debt problems worse rather than better. In this series, WalletPop takes a look at the debt settlement industry, explaining how it works and talking to some of its players. This is the third installment in our debt settlement series.

After much thought -- and a lack of sleep over your growing debt -- you've decided to try to work with a debt settlement company to get some relief. But just how should the process work?To help you understand just what you need to do to find, choose and work with a debt settlement, we've outlined the steps for you. But keep in mind that, working with a debt settlement company isn't your only choice -- you can do all this on your own without anyone's help. A debt settler would tell you -- and obviously their opinion is biased -- that it isn't easy to get a credit card company to, say, slash your debt in half and then let you pay that debt back in installments. And they may well be right on that point. But if you're deeply in debt, it can't hurt to try it on your own first.

If you still decide you want to use a professional, here's how the process generally works:

Step One: Find a Reputable Debt Settlement Company. This isn't an easy task because there are so many dishonest ones out there. Don't select any company until you've done your research. And if the company hasn't been in business very long, stay away, even if that isn't very fair to the new and ethical debt settlement companies out there. There's no reason for you to be a guinea pig.

Step Two: Have Your First Consultation With the Debt Settlement Company. As we discussed in our first story in this series, it'll probably take an hour or so for you to bring the debt settler up to speed on your financial picture. If the person you're talking to breezes through everything or isn't willing to spend some serious time getting to know you, that's a red flag that you may need to do business with a different company.

Step Three: Leave With a Plan. After you've spent some time discussing your situation with the debt settlement company's representative, you should leave their office knowing just what will happen next. And here's where everything gets tricky. First of all, if you chose to work with a nonprofit debt settlement company, there may be an upfront fee, but it typically won't be more than $50 to $75. A for-profit debt settlement company is no longer allowed to charge any upfront fee.

As for that plan, it's important to understand it. I know: Duh! But if you're a blubbery mess when you're talking to the debt settler, and just grateful that someone is, at long last, going to help you pay off your debts and stop those irate collection calls ... well, it could be easy to walk out of a there not fully comprehending just what a complicated journey you're about to embark on.

Mike Croxson, president of CareOne Services, Inc., one of a handful of nationally-known debt settlement firms that has a solid reputation, says that your plan might typically work like this:

"Let's say you've got three creditors," Croxson says. "You owe Bank of America, Chase and Citigroup each $10,000, so you've got $30,000 outstanding and you can't afford the $600 a month that a debt management plan would require you to pay."

By a "debt management plan," Croxson is referring to a plan where you don't settle your debt by getting your creditors to lower the sum you owe. Instead, you still pay everything owed but your interest is reduced, making it easier to stay on top of your debts. CareOne, incidentally, also works with people on debt management plans. In fact, because they have a number of services, he'd rather me call CareOne a debt "relief" company.

"So you can't afford a debt management plan," continues Croxson, "but you can afford to put $400 every month into an escrow account." Eventually, says Croxson, after, say, a few months, the debt settlement company would call the credit card companies and work out a deal. So perhaps instead of owing three companies $30,000, you would end up owing $15,000. And then, says Croxson, they might work out an agreement where the consumer pays $400 a month until that $15,000 is paid off. (And, of course, during this time, interest is building, but at least it's building on a smaller pile of debt than you used to have.)

"You would have saved 50% of what you owed, and my fee is 30% of what I've saved you," says Croxson. "And I'd get paid along the way as you pay."

So if you're paying $15,000, having saved 30%, you're eventually going to shell out $19,000, a hefty sum, but one that's admittedly much better than $30,000. And the way it's set up is that the more money you have shaved off your total debt, the more the debt settler earns. So the incentive is there for the debt settlement company to convince your creditors to lower the debt as much as they are willing.

This is much better than the old model, where a consumer would often pay that 30%, or some other large fee, at the very beginning of the process, instead of throughout the process after progress is actually being made. And then, being out thousands of dollars, the indebted person would often find that they couldn't pay off that 50% because they were now broke, having hired a debt settler ... and, well, you can see how people would get into more trouble, even after doing business with the honest debt settlement companies.

Step Five: Make the Plan Happen. The plan won't be palatable to everyone. For example, if you owe $30,000 and you want to try to lower that debt to a more reasonable number, you're going to have to wait until the money builds up in the escrow account before the debt settlement company will contact your creditors on your behalf. Unless, of course you have several thousand dollars in a bank account you can immediately put in that escrow account. If that's the case, your debt settlement company will start making calls to your credit card company as soon as possible.

If you don't -- as most people in debt don't -- you're going to be putting money into that escrow account for several months beforehand, until you've compiled some serious cash. At that point, the debt settlement company will start working out a deal with your banks and creditors. What you're doing is proving to the credit card companies that you're making an honest effort to collect some money and pay them off.

So during those several months, you won't be paying your credit cards bill and you'll be going even further into debt. The collection calls will be increasing, and your credit card companies will be even more unhappy with you. And at some point, if you wait long enough, you may get a letter from a bank stating that they're going to collect their money one way or another, even if that means going to court. Yes, you could get sued.

Depending on your tolerance for risk and financial stress -- and if you're the sort to take these collection calls personally -- working with a debt settlement company may not be for you. But if you're stoic about this sort of scenario, you'll probably understand that, provided you've been making a good effort to put money into the bank, long before anyone goes to court, your debt settlement company will almost certainly work things out.

When you walk out of that debt settlement company with a plan in hand, you're perfectly entitled to feel better and grateful that you have a company of debt management experts on your side. But don't for a moment imagine that the next few years -- yes, years -- are going to be stress-free. They won't, and refreshingly, Croxson admits that.

"You're talking about a program that will last two, three, four or maybe five years," says Croxson, "so you need to be comfortable during the conversations you have with your debt settler and feel that you're going to get the support you need. If you don't feel comfortable that somebody is going to be there to get you through this, you should look for another provider."

Want to learn more about the debt settlement process? Read the first and second installments in our series on debt settlement companies.

Geoff Williams is a regular contributor to WalletPop. He is also the co-author of the book Living Well with Bad Credit.

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