It seems like you can’t turn on the television or the radio without hearing advertisements from companies that promise to settle your debts for 50 cents on the dollar. It’s an attractive offer, especially if you, like many consumers, are struggling with your finances. There are organizations that may be able to help you, but using a debt settlement company could be a trap that will leave you deeper in debt instead of eliminating your debts.

In debt settlement, you are instructed to make monthly savings payments, usually to a special bank account, until there is enough to make a lump-sum settlement offer to your creditors. But while you are putting money into your account, the debt settlement company is taking its fee out. Saving to try to settle one debt can take a year or more, and since most people typically have multiple debts they want to try to settle, the process can take three or four years. However, debt settlement companies usually take out all of their fees, ranging from 14 to 20 percent of the total debt, within the first several months of the contract. For debts totaling $20,000, you could pay fees of $2,800 to $4,000.

In fact, debt settlement companies usually collect most or all of their fees from consumers long before they have eliminated any of their debts. There is no guarantee that your debts will be settled, and you’ll pay regardless of whether they are or not. It’s hard to save up enough to make a settlement offer when a significant amount of your savings is being siphoned off to pay these fees. That may be one reason why the drop-out rate for debt settlement services is so high. A study of one company’s customers revealed that 60 percent had cancelled within 5 to 6 months after starting debt settlement. Claims for success rates can be very misleading because they often don’t take into consideration the cost of the fees consumer pay or the size of those debts that are never settled.

Another thing that many consumers may not realize is that using a debt settlement program doesn’t stop debt collection and could make their debt situations worse. Debt settlement companies often don’t contact the creditors for months, and creditors are not obliged to deal with them. Some debt settlement companies even tell consumers not to have any contact with their creditors and to stop making any payments to them in the meantime. As a result, the consumers’ debts increase because of interest and penalties, and they may end up being hounded by debt collectors, sued by their creditors, having their wages garnished, and left with ruined credit ratings.

Consumer Federation of America, Consumer Action, Consumers Union, and the National Consumer Law Center have issued tips for consumers in both English and Spanish on how to avoid the debt settlement trap and get real relief. The first step is to resolve your debt problems with your creditors directly, but if that doesn’t work, a nonprofit consumer credit counseling service can give you advice and may be able to make payment plans with your creditors. There may be a small fee for the counseling service to administer the plans, but you’ll be paying with the certainty that you are actually paying down your debts and not just throwing money out the window.

Consumer Federation of America and several other groups have also urged the Federal Trade Commission to crack down on abuses by debt settlement services and companies that offer other types of debt relief, such as lowering consumers’ interest rates. In our comments to the FTC we said that for-profit debt relief services should not be allowed to ask consumers to pay more than a very small set-up fee until they have accomplished the results that they promised. If you’re looking for a debt settlement service, find one that only charges when it has actually settled your debts. If you need help dealing with your mortgage payments (which debt settlement companies don’t address) find a certified local housing counselor who can advise and assist you.

It's a new year and the start of the tax season and many of you are taking a hard look at your finances. Saving money and/or reducing debt remain one of the most popular resolutions remain each year. Make 2010 your year for financial action. Even with the recession, you can make changes to improve your financial future by:

• Start (or add to) an emergency fund. An emergency fund is your protection against unexpected expenses. Having an emergency savings fund may be the most important difference between those who manage to stay afloat and those who are sinking financially. That's because maintaining emergency savings of $500 to $1,000 allows you to easily meet unexpected financial challenges such as car repair or a medical bill and avoid high interest, short-term loans.
• Track your spending. If you're looking for ways to cut back, your first course of action should be to know where your money is currently going. Knowing how you and your family spend money can help identify areas to reduce your spending.
• Let go of bad habits and bank your savings. A simple behavior change, like bringing your lunch to work rather than buying, can add up to big savings over time. Find one or two things in your life (i.e. cable television) to cut back on and bank the difference. What you don't see, you will probably not miss.
• Go automatic! Treat savings like another bill by setting up automatic monthly transfers at your financial institution from your checking to savings account or having a portion of your paycheck directly deposited into your savings. Savers who save automatically are more likely to be successful long-term.
• Save all or part of your tax refund. With IRS Form 8888, you can choose to save all or part of your tax refund.
• Take advantage of free money at work. Many employees turn down free money from their employer by not signing up for a work-related retirement program such as a 401(k) plan. Savers with a dollar-for-dollar match would likely receive an annual yield of greater than 100% on their investment.