Settle your debts yourself

With hard times here and revolving-credit debt in the U.S. reaching just short of a trillion dollars, companies that offer consumers a chance to reduce or even eliminate credit card debt through debt management plans are proliferating.

But for anyone facing a pile of bills they simply can't pay, it's important to ask whether these companies have the best interest of their clients at heart.

Debt management, or debt settlement, companies typically charge several thousand dollars in fees, says Charles J. Phelan, president and founder of Zip-Debt.

"That fee is stacked up in the first 12 months or so of your payments to them," Phelan says. "So nothing gets settled in the first year, and that greatly increases the risk of legal action."

"One thing you absolutely want to avoid is a debt elimination program," warns Gerri Detweiler, founder of Ultimate Credit Solutions Inc. and co-author of the forthcoming "Stop Debt Collectors: How to Protect Your Rights and Resolve Your Debts."

"They claim there are legal ways to wiggle out of your debt and pay nothing, then charge large fees to erase your debt. Credit card debt is not illegal, and you cannot pay someone to erase it."

Debt counselors say that with patience and determination it's possible to strike deals with your creditors yourself.

"Debt settlement, like the law, is a service-based business," says Jeff Boulton, CEO of RiseAboveDebtRelief.com. "You can represent yourself in court, and you can settle with your creditors yourself."

When settling makes sense

"I recommend that anyone thinking about debt settlement talk to a bankruptcy attorney to see what their options are, especially if they owe more than $10,000," Detweiler says. "If you do qualify under the new rules to do a Chapter 7 bankruptcy, that could make more sense."

Changes in the bankruptcy law in 2005 made it difficult for many people to file for Chapter 7 bankruptcy, which liquidates debts. If you have regular income and there is some leftover after you pay basic expenses, then you must go to Chapter 13 bankruptcy, which requires that you pay back some or all of what you owe over five years under a very rigid payment structure, says Phelan, who calls Chapter 13 "the worst of both worlds."