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Debt Management Guide 2008
Bad credit
Bad credit can hurt a consumer in many ways. Understand how debt negotiation and bankruptcy work.
Bad credit
Debt negotiators may crush your credit

If you're saddled with thousands of dollars in credit card debt, the lure of someone promising to cut your debt in half could be strong. But debt negotiators -- companies that try to persuade your creditors to forgive some of your debt -- may be more of a hindrance than a help to your credit situation in the long run.

Debt negotiators contact creditors for consumers and try to work out a payment plan that those consumers can afford. They also go to bat for consumers who are financially unable to repay a debt, and in some cases convince the creditors to take what they can get and forgive the rest.

But while losing part of your debt load might sound appealing, it might not be the best move.

"Steer away from debt negotiators," says Nick Jacobs, director of public relations for the National Foundation for Credit Counseling. One reason: Debt negotiators don't work for free, Jacobs says. Negotiators have various ways to determine their fees. Some charge an upfront cost. Others charge a percentage of your total debt while others charge based on the amount they are able to get creditors to forgive.

Any way you look at it, the money you give the debt negotiator could be money used to pay down debt. Not only that, but it's important to do the math. If a debt negotiator gets creditors to forgive 15 percent of your debt and the negotiator wants 10 percent for his work, you might have been better off applying the 10 percent to your debt.

Another reason a debt negotiator can spell bad news for you and your credit is because they often tell consumers to stop paying their bills while negotiations take place.
"The problem with that is you have an obligation to the credit card company to make a payment, so in not doing that, you're harming your credit rating and creditors are well in their rights legally to do whatever they have to do," Jacobs says. "You're really playing with loaded dice."

Mixed blessings
What if the debt negotiator is able to convince your creditors to forgive some of your loans? Won't that raise your credit score?

Not necessarily, and it might make the situation worse.

If credit card companies write off your debt as a "charge-off," other creditors will not view you as a good risk since you have a record of not paying your debts in full.

-- Updated: June 16, 2008
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