Let's say a creditor agrees to settle for $4,000 of the $5,000 you owe. You've saved $1,000, but a debt negotiator will want a big cut, often 20 to 35 percent, for themselves. That's not much of a deal, especially when you toss in the other fees that you have to pay.

One of Benson's clients learned that lesson the hard way. She's 82, single and had $2,128.81 of debt she wanted to settle with the help of a debt negotiator. The company charged her an initial application fee of $250 and an initial legal processing charge of $1,345. That's $1,595 in fees right off the bat for help with just over $2,100 in debt.

Talk about a lousy deal.

The hit to your credit rating
Sky-high fees are only part of the problem when you do business with a debt negotiator. Your credit takes just as much of a hit as your wallet.

Here's why. Often, a debt-negotiating company will tell you to stop making payments to creditors and to send money to them instead. The money gets placed in an account until the debt negotiator decides to make an offer to a credit card company.

And that could take awhile, especially if you pay a negotiator through monthly payments rather than forking over a large sum upfront.

It could be several months before a debt negotiator has collected enough money from you to make a settlement offer to a creditor.

And after several months of not paying your creditors, your credit will be trashed.

"They tell you to stop talking to creditors, which is a bad idea," says Dianne Wilkman, president of Springboard, a nonprofit, consumer credit management company in Riverside, Calif.

"Your creditor will charge off your account and that will ruin your credit."

Creditors typically write off or charge off a debt if there has been no payment on the account for more than 180 days or six months. A charge off will remain on your credit report for seven years plus 180 days from the date of the first nonpayment, according to the Fair Credit Reporting Act.

"A charge off is the biggest negative red flag on your credit report," Richard says. "It means a lender lost money doing business with you."

So even if a debt negotiator is able to lower a credit card balance as promised, you could be stuck with a dismal credit record for more than seven years.

Here's another thing to worry about. If a creditor refuses the settlement amount offered by a debt negotiator, you could be sued.

Just ask Raquel Avila, of Millbrae, Calif. She signed on with Debtco in August 2001 for help with $10,000 of debt spread over five credit cards. The card debt was left over from her university days.

"I was just making the minimums. I foresaw myself paying this debt forever, paying the minimum. That's why I went to them," says Avila, 28.

She paid Debtco a $1,000 upfront fee and agreed to $250 monthly payments. Debtco would also take a 25 percent cut of any forgiven debt.

She stopped paying her creditors and sent payments to Debtco instead. She was told she would be debt-free in three years.

Last July, one of her creditors sued her for nonpayment.

"I ended up getting summoned in July and I got scared," Avila says.

"I was never told this could happen. They said there are some creditors that want their money right away and that I should talk to a lawyer."

She ended up settling the disputed debt in November.

"At the beginning I didn't feel it would hurt my credit this much," Avila says. "I feel like it's hurting me more now."

After 19 months with Debtco, she still owes several thousand dollars on three credit cards.

"They're basically telling me I need to send them more money," Avila says. "I don't really foresee myself getting out of this, this year."

Steve Dahl, a senior vice president of sales and marketing at Debtco, says only a small percentage of Debtco clients get sued and most settle the suits out of court.

"Probably less than 9 percent of our consumers ever get sued," Dahl says. "That's a reality. We put that in our contract. We always let people know that's a possibility."

Getting angry calls from collection agencies is another unpleasant reality associated with debt-negotiation programs.

"This is boot camp to avoid bankruptcy," Dahl says. "It's tough and it can be nasty."

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