Dear Credit Card Adviser,
I have at least three calls on my answering machine per week from companies telling me they can lower my credit card debt. I answered one such call and the person said they negotiate a lower rate. I replied, I can do the same if I call them myself; but he then claimed if I had $10,000 in debt, they could get that reduced to $5,800.

1. Who are these people? 2. What is the proper term for this practice? 3. How does this affect my credit?
— Mary

Dear Mary,
The calls you’re receiving are likely from debt settlement or debt negotiation companies. Areas hard hit by the subprime mortgage meltdown are prime targets for debt relief ads. What these companies do is make offers to your creditors to satisfy unsecured debts for significantly less than you owe. Despite the claims, settlement is not an easy way to slash debt, doesn’t always work and could wreak havoc on your credit score.

Some firms may not be transparent about the process and fees involved. “Companies often front-load their fees, where the company gets paid before any money goes to the creditor. It may be months before the consumer realizes any benefit from the arrangement,” wrote Gail Cunningham, vice president of public relations for the National Foundation for Credit Counseling, in an e-mail.

Meanwhile, settlement companies often advise consumers to stop paying and communicating with their creditors; instead they tell you to send payments to the firm, which promises to hold the funds in an account until there’s enough to make an offer to the credit card company.

Your lenders will tack on interest and fees for the missed payments, and the resulting late pays and escalating balances could sink your credit score. Even worse, your creditors may not accept the settlement offer. They could sue you for the delinquent debt.

Let’s say all goes well and the account is settled. You might owe taxes on the forgiven debt. Also, the notation on your credit report that the account is settled (rather than paid in full) could further depress your credit score and look bad to future lenders. After all, you made a partial payment in lieu of the whole amount.

If budgeting, issuer hardship programs, credit counseling and debt management plans fail to work for you, you might consider making a settlement offer on your own. You don’t need to hire a third-party debt settlement company. Read the Bankrate feature “Settle your debts yourself” to learn how.

“If you can’t settle it, there’s no way a debt settlement company is going to be able to do so, because they’re going to offer less than what you’re going to offer,” says John Ulzheimer, president of consumer education at and a CNBC contributor. The large pile of money going to the settlement outfit would leave you with less to present in a settlement.

Beyond these options, consider talking with a bankruptcy attorney.

Read about all your debt relief options in the Federal Trade Commission’s fact sheet “Knee Deep in Debt.”

Good luck!

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