Debt Consolidation: Too Good to Be True?
By BankingMyWay.com Staff

Rising unemployment rates and a shrinking national economy have left many people struggling under a heavy debt load. Major lenders such as Bank of America (Stock Quote: BAC), JPMorgan Chase (Stock Quote: JPM) and American Express (Stock Quote: AXP) have been forced to write-off billions in credit card debts in the past months.

Desperate for a way out, some are turning to companies that promise to slash debt in half (or even eliminate it altogether), all for just the cost of a phone call and a fee. But many of those plans will actually leave consumers worse off than where they started.

If you're tempted to accept a company’s offer to help with your debt, here are a few things to know about debt consolidation.

What are the plans?
Debt negotiation and consolidation plans involve repaying your debt with a payment plan that involves lower interest rates, a consolidated debt payment and possibly debt forgiveness. Debt elimination, on the other hand, generally relies on a claim that the original line of credit was illegal and so you don't have to repay the debt. "The claims on debt eliminations plans are just blatantly false," says Alison Southwick, media relations manager with the Council of Better Business Bureaus (BBB). "Simply wiping away your debt is one of those things that is way too good to be true."

Red Flags
Any company that requires an upfront fee, makes a guarantee that they can cut your debt in half, or recommends that you stop communicating with your creditors is best avoided. Southwick explains that those upfront fees (sometimes on the order of 15% of the overall debt) often divert money intended for debt payments, which allows late payment fees and interest to add up, actually worsening the situation for the consumer.

Meanwhile, promises and guarantees offered by these companies are often worthless given that every financial situation is unique. In most cases, fine print on the company's website will describe just how little a guarantee or promise actually covers. And never agree to stop checking in with your creditors. "People will think the company has their back and so they don't need to do anything," says Southwick. "But you should never assume everything is working out -- stay in contact with your lenders."

Even if a company doesn't raise any red flags, it's still a good idea to take a look at its reliability report from the BBB website.

Debt Alternatives
In many cases, consumers are better off contacting a credit counseling organization. Many of these organizations are non-profits that help consumers to deal with their existing debt problems and help avoid problems down the road. For help choosing an organization near you, check out the National Foundation for Credit Counseling and a list of tips from the BBB.

Before getting involved with a debt company you don’t feel comfortable with, it’s also worth contacting your lender. Credit card companies, for example, are often willing to lower interest rates if that means preventing a default. If you’re deep under water on your debt, it might not be enough to make a difference, but it’s better than getting a bum deal from an unscrupulous company.

For more on debt consolidation:
“Do Debt Relief Services Help or Hurt?”
“How to Negotiate Your Credit Card Bill”
“How to Negotiate with Your Creditors”

—For more ways to save, spend, invest and borrow, visit MainStreet.com.