If you have been facing serious debt for any length of time, the concept of debt negotiation may have caught your interest. Debt negotiation is different from debt management planning or credit counseling. Although the service may sound attractive and legitimate, you should proceed with caution. There is risk involved in the process. Plus, there is the potential that your credit report could be harmed, making it more difficult for you to obtain credit in the future. Because of these negative factors, debt negotiation companies may face legal restrictions in your state.

It is common for debt negotiation companies to highlight their nonprofit status. The promise that they offer is to reduce your unsecured debt to a fraction of the original amount. Typical claims are that you can save from 50 to 90 percent. This means you could end up paying back the creditor a mere ten cents of every dollar borrowed. A $10,000 debt could be cleared with as little as $1,000 to $5,000.

The services offered by debt negotiation companies are often portrayed as better choice than bankruptcy. Prospective customers are assured that future credit applications won’t be affected. Companies also point out that any negative information related to debt negotiation can be removed from your credit history. You will often be advised to stop making payments to your creditors. Instead, you send payments directly to the debt negotiation service who hold the funds in a separate account. Then the company pays your creditors for you.

Here are some areas where you should be careful. First of all, don’t let the nonprofit label keep you from doing some research. A company’s tax status is no guarantee of its legitimacy. Second, you don’t know for sure that your creditor will accept partial payment of your debt. The recommended actions of the debt negotiation company may lead to additional interest charges and late fees.

Once a creditor starts ramping up the charges and fees, your original balance can increase quickly. Sometimes your balance can double or triple in only months. And debt negotiation companies don’t work for free. You should expect to pay fees to open an account with the company, monthly service fees while they work, and a final fee based on the percentage of the amount they claim to have saved you. By the way, any amount of debt that is forgiven by your creditors is viewed as taxable income by the Internal Revenue Service.

Creditors are not required to negotiate any amount you owe. However, they are legally obligated to provide credit reporting agencies with accurate data. If you stop making monthly payments, they will report this negative information. In extreme situations, creditors can and will take you to court to get what you owe them. If you owe the money, they will win the lawsuit. There really is no defense in these matters. A winning judgment usually means they will take a portion of your wages or put a lien on your home.

Here is a recap of the danger signals when considering debt negotiation companies. Avoid companies that:

• guarantee removal of unsecured debt,
• advertise pennies on the dollar payoffs,
• charge large service fees every month,
• charge fees based on the total forgiven debt,
• assure you your credit report will not be harmed,
• advise you to stop paying your creditors,
• advise you to stop talking to your creditors,
• demand direct payments to themselves, and
• promise you will never be sued.

There is no substitute for your own due diligence. If you choose to consider a debt negotiation company, contact your state Attorney General for more information. Get in touch with the Better Business Bureau and any local consumer protection agency. Consumer complaints are a danger signal that you should heed. Finally, confirm that prospective companies are licensed to operate in your state.