NEW YORK (CNN) -- The Better Business Bureau is out with a new warning: beware of some debt settlement companies.
It's not only the Better Business Bureau sounding this alarm. The Government Accountability Office just came out with the results of an undercover investigation of the industry. It found that some debt-settlement companies engaged in fraudulent, deceptive and abusive practices. And just last week, new legislation was proposed by Sen. Schumer, D-N.Y., and Sen. McCaskill,D- Mo., on regulating this industry.
Not all debt-settlement companies are out to deceive you. But there are some rogue firms that claim they can negotiate a settlement with your creditors for less than what you owe ... after you pay an up front fee of as much as 20% of your total debt.
The debt-settlement company sets up an account where you deposit money. The money is used to pay for negotiated settlements. Now, it usually takes six months to a year before there's enough money to start settling accounts. And during this time, you won't be making payments to creditors. And that's where you can get into trouble.
You risk piling up more interest and penalty charges and you could be dragged into court by your creditors. Your wages can be garnished and your credit score will take a huge hit.
Here are some red flags to look out for: First, high up front fees. That should set off alarm bells.
Don't trust promises that your debt can be cut in half. And finally, don't be swayed by claims that debt settlement is a fast, easy and painless process. It's anything but easy.
Despite pressure in Washington to regulate this fast-growing industry, right now, states are largely responsible for policing it.
If you are really set on working with a debt-settlement company, make sure to check them out with the Better Business Bureau.
A better move is to try calling your creditors directly. That's free and something you can do on your own.
Or, go to a legitimate credit counseling service that can help you work out a payment plan with creditors. Generally you'll pay $25 to enroll and monthly fees that don't exceed $50. Check out NFCC.org.
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