One in 10 Americans are struggling to pay their mortgage. A growing number have also fallen behind on their credit card bills.
Tight economic times have some people turning to companies that promise to reduce or eliminate debt. But while some of these programs are legitimate, some could leave you even deeper in debt.
Two years ago Mike Lang of Virginia Beach, Va., had so much credit card debt he had trouble sleeping at night.
Just how deep was he in?
"Close to $33,000, over 3 credit cards, which I don't recommend to anybody," he told CBN News.
Mike was so desperate to pay his debts off that he enrolled in something called a debt settlement program through a company that promised relief.
"They took care of all the harassing phone calls, the e-mails, the letters in the mail, the debt collectors," he said. "I gave them my power of attorney and they took it from there."
But Mike is not alone.
During the country's recession, many Americans are having a hard time paying their bills and that has created a boom in businesses that promise quick and easy debt relief.
Debt settlement is a perfectly legal solution for consumers who have fallen behind on their bills. But having a debt-settlement company do the legwork for you is risky -- and it can be expensive.
Here's how debt settlement companies work:
The company gets your creditors to accept less than the full amount you owe. They promise to knock 50 percent or more off of the debt you have to pay back, with repayment taking between two and four years.
The company then sets up a savings account for you, and you make monthly payments to that account. When you've made all the payments, the debt settlement company settles with your creditors in one lump sum.
You are told to stop making payments to your creditors and not to contact them. Leave the negotiating to the debt settlement company.
When you go this route, you could end up owing more than when you started, and your credit suffers because you stop paying your bills.
And that's not all.
Some debt settlement companies charge advance fees that can run up to $1,000 or more.
Attorney Sarah Gottovi of the Federal Trade Commission says the agency is concerned about misleading and abusive practices in the debt settlement industry.
"Many companies will charge upfront fees that might be the first of several payments, the first several monthly payments that's paid to the company and that will go to the companies fees instead of into the savings account to pay the creditors," Gottovi told CBN News.
She mentioned that other fees could also be added in.
"The debt settlement company may charge a monthly fee, an account maintenance fee, and they also might charge you a fee at the end of the program when they've settled an account," she said.
Gottovi said the FTC has received hundreds of complaints about the claims of some debt settlement companies.
But Mike Lang had a more positive experience with a debt settlement company. He credits the debt settlement program he enrolled in with helping him get his $33,000 mountain of debt down to almost nothing.
"My final credit card, it was close to a little over $12,000 and they settled with the other company for $2,000 and (it was a) big weight off my shoulders."
But if you're considering signing up with a debt settlement company, you need to pay attention to the red flags such as:
Does the company charge an upfront fee?
Do they tell you to stop making payments to your creditors?
Do they claim they can eliminate your debts?
Are they licensed in your state?
Has the Better Business Bureau received complaints about the company?
And read the fine print -- the money you save through negotiation could be considered income that you have to claim on your taxes.
Attorney Kirk Levy said a better way to go is to look for organizations that offer help for free.
"Sometimes we have consumer credit type companies that are not for profit, they're helping people," Levy said.
And many people don't realize they can negotiate with their creditors themselves. Creditors are usually willing to work with consumers to pay back their debt.
Terry Strouss of Virginia Beach, Va., once owed $30,000 dollars in credit card and other debt. He was seriously behind on all his payments. But he prayed to God about what to do. That's when he found out through a friend that he could arrange debt settlement with his creditors on his own.
"Most of them were willing and it took some time to negotiate the amount of money that I could, it was difficult at times getting them to come down to what I could manage," he said.
After negotiating his debt down, Terry had to come up with lump sums of cash to settle his debt for the lower amount. He said that was tough, but admitted it was well worth it. Almost all of his debt has been paid off.
For Mike, a reputable debt settlement company was the best option. Today, he is also nearly debt-free, he's slowly rebuilding his damaged credit, and best of all, he said he can finally get a good night's sleep.
But if you choose to have a debt settlement company negotiate your debt for you, experts say make sure you ask lots of questions, read the fine print, and know exactly what you're getting into before you take the plunge.
*Originally aired Sept. 21, 2009