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Getting Out of Debt

Debtors Beware

Debt-settlement agencies that promise relief can add to woes.

With a debt monkey on your back, the prospect of fast relief and a debt-free life seems like a welcome respite. But don't be taken in by debt-settlement companies that essentially promise "to wave the magic debt wand three times and make debt disappear," says William Binzel, senior adviser and counsel for the National Foundation for Credit Counseling. "It's just deceptive."

Debt-settlement agencies may require clients to pay more than $1,000 in fees upfront. Then they are usually told to stop paying their creditors and to send money to the agency instead, to be deposited in an account. Settlement agencies claim that a lump sum makes it easier to negotiate with creditors. But many creditors -- Bank of America, for one -- say they will not work with settlement agencies and would prefer that customers call them directly. Debtors who stop payments to creditors risk incurring multiple penalties that will only increase their debt burden, pushing their bills into collection and damaging their credit scores. Creditors might even sue.

Instead of seeking an easy way out, consumers should meet with a reputable credit counselor to get budgeting advice or work out a repayment plan with no exorbitant fees (find a counselor at www.nfcc.org). Or contact creditors directly.