Settle your debts yourself

"But they don't usually act quickly to sue you, because it will be more expensive for them, and even if they get a judgment against you, it can be very difficult for them to collect."

Different creditors have different guidelines, she says, "but in the overall scheme of things most consumers who work with professional debt settlers end up settling all their debts for about 50 to 60 cents on the dollar. It's a question of how likely the creditor thinks they are to get anything out of you."

Once a creditor agrees to a settlement, get it in writing, says Boulton.

"This is where a lot of consumers make a mistake," he says. "The creditor will say, 'OK, but you need to pay us today.' Then that amount actually goes towards interest. So before you pay anything, get the settlement offer in writing on the company's letterhead -- and another letter stating that the payment has been made, and the debt is discharged."

Without that proof, says Detweiler, the forgiven balance could end up with another collection agency.

"I don't recommend letting them take out an automatic bank draft," she adds. "A bank check is preferable."

Aftereffects

"Creditworthiness has two components," Phelan points out, "debt-income ratio and credit score. So yes, your credit score will go to the subbasement. But as soon as you settle your debt, your debt-income ratio will vastly increase. So your credit rating can return to reasonably good shape within about two years."

Taxes are another concern, he says. A creditor who forgives a debt of $600 or greater must issue a 1099C form that is counted as taxable income.

But, the IRS allows an insolvency exemption, Phelan says.

"The purpose of a debt-settlement program is not to walk away from the obligation," he says, "but to work out a mutually agreeable settlement. If you go about it with a spirit of good faith, you can come to a workable compromise you can both live with."