Debt settlement, or agreeing to pay a creditor less than you owe, should be avoided, if possible. It's a huge mark against your credit score, and the fees and taxes you pay as a result of the settlement may offset what you save by paring down the debt.
A less-drastic measure such as debt management may resolve your dilemma. That's why it's important to get credit counseling as soon as you see the warning signs: Your income is too low to keep up with your debt or you're borrowing from one creditor to pay another.
"When you reach that point, you need to get some advice on what options are there for you, whether it's working on your budget, doing some kind of debt-consolidation loan, free advice from a credit counselor, debt settlement or bankruptcy," says Russell Graves, president of the Association of Credit Counseling Professionals.
If it turns out debt settlement is your best option, the good news is that many creditors are now willing to negotiate, says Mary Jackey, spokeswoman for the Consumer Credit Counseling Services, based out of Columbus, Ohio.