What are debt settlement/debt relief services and should I use them?

Debt settlement companies, also sometimes called "debt relief" or "debt adjusting" companies, often claim they can negotiate with your creditors to reduce the amount you owe. Consider all of your options, including working with a nonprofit credit counselor, and negotiating directly with the creditor or debt collector yourself. Before agreeing to work with a debt settlement company, there are risks that you should consider:

• Debt settlement companies often charge expensive fees.
• Debt settlement companies typically encourage you to stop paying your credit card bills. If you stop paying your bills, you will usually incur late fees, penalty interest and other charges, and creditors will likely step up their collection efforts against you.
• Some of your creditors may refuse to work with the company you choose.
• In many cases, the debt settlement company will be unable to settle all of your debts.
• If you do business with a debt settlement company, the company may tell you to put money in a dedicated bank account, which will be managed by a third party. You may be charged fees for using this account.
• Working with a debt settlement company may lead to a creditor filing a debt collection lawsuit against you.
• Unless the debt settlement company settles all or most of your debts, the built up penalties and fees on the unsettled debts may wipe out any savings the debt settlement company achieves on the debts it settles.
• Using debt settlement services can have a negative impact on your credit scores and your ability to get credit in the future.

Warning: Debt settlement may well leave you deeper in debt than you were when you started. Most debt settlement companies will ask you to stop paying your debts in order to get creditors to negotiate and to collect the funds required for a settlement. This can have a negative effect on your credit score and may result in the creditor or debt collector filing a lawsuit while you are collecting settlement funds. And if you stop making payments on a credit card, late fees and interest will be added to the debt each month. If you exceed your credit limit, additional fees and charges may apply. This can cause your original debt to increase.

Avoid doing business with any company that promises to settle your debt if the company:

• Charges any fees before it settles your debts
• Represents that it can settle all of you debt for a promised percentage reduction
• Touts a "new government program" to bail out personal credit card debt
• Guarantees it can make your debt go away
• Tells you to stop communicating with your creditors
• Tells you it can stop all debt collection calls and lawsuits
• Guarantees that your unsecured debts can be paid off for pennies on the dollar

Tip: Before you do business with any debt settlement company, contact your state Attorney General and local consumer protection agency . They can tell you if any consumer complaints are on file about the firm you're considering doing business with. Some states require debt settlement companies to be licensed. You can check with your state regulator or ask your state Attorney General if the company is required to be licensed to work in your state and, if so, whether it is. You can also view the Federal Trade Commission's page on "Coping with Debt " for more information.

An alternative to a debt settlement company is a non-profit consumer credit counseling service. These non-profits can attempt to work with you and your creditors to develop a debt management plan that you can afford, and that can help get you out of debt. They usually will also help you develop a budget and provide other financial counseling.

Also, you may want to consider consulting a bankruptcy attorney, who may be able to provide you with your options under the law. Some bankruptcy attorneys will speak to you initially free of charge.

Warning: There could be tax consequences for debt forgiveness. If a portion of your debt is forgiven by the creditor, it could be counted as taxable income on your federal income taxes. You may want to consult a tax advisor or tax attorney to learn how forgiven debt affects your federal income tax.