Debt-Settlement Traps

No doubt you've seen debt-settlement companies advertise that they'll work with your creditors to reduce the money you owe. But Consumer Reports says, watch out, because you could end up in even worse financial trouble.

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.

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 up-front fee, plus 20% if they reach a settlement."

Consumer Reports says a better option-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," said Tiernan.

Another option-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.

Consumer Reports says that in this bad economy, it expects unscrupulous debt-settlement companies to flourish.


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