Most debt negotiation agencies are scams

You've probably seen lots of tempting ads on TV (or heard them on radio) that promise to erase your debt for pennies on the dollar. Before getting involved with any debt negotiation agency, be sure to research the firm with your state Attorney General and your state's consumer office.

One reader recently asked:

There has been an increase in advertisements for debt negotiation agencies that are different from debt consolidation. They state that they can negotiate your debts down rather than consolidate. I already checked with a reputable consolidation agency and the consolidated monthly payment is more than my combined monthly minimum payments which I cannot afford. Are these debt negotiation agencies a viable alternative or a sham?

My vote would be that a debt negotiation agency is more likely a scam, but there may be some good ones out there. The FTC has closed down many of them because instead of helping consumers pay off their bills, they've driven them to bankruptcy. Often the FTC works with the state attorney general in bringing these cases. Here's how most of the scams work:

* They'll ask for money upfront as a retainer (most of that goes to the telemarketer who signed you up)
* They ask for a list of your creditors and total amount of your debt.
* They usually asked for monthly administrative fees of $30 to $40 a month and they'll take a percentage of what they save you.
* They tell you to stop paying your creditors because then they can make a hardship case for you.
* They tell you to put the money you would normally pay your creditors into an account and as that account balance builds up and you have enough to pay off a creditor, they will negotiate settlements of pennies on the dollar.
* They usually do nothing for two or three months and by that time you'll be hounded daily by collectors.
* Often they never do anything to help pay off your debt.

Consumers who get caught up in these schemes usually end up in worse shape then before they started with the debt negotiation agency and have nothing left to do but file for bankruptcy. I'm sure you've heard the phrase, if is sounds too good to be true, it probably is. Well for most negotiation agencies the deal is too good to be true.

The best way to find help with your debt problems is to work with a non-profit credit counseling service. To be sure you are working with one that is truly non-profit use the resources of the National Foundation for Credit Counseling.

Lita Epstein has written more than 25 books including the "Complete Idiot's Guide to Improving Your Credit Score" and "The 250 Questions You Should Ask to Avoid Foreclosure."
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