The ads are compelling. Settle your debts for a fraction of what you owe, like Mr. Gregg who paid off $22,569 in credit card debt for only $3,160.

The commercials go on to suggest that banks and credit card companies are desperate for cash and will agree to accept pennies on the dollar to "settle" your debts. Sounds great, but can "professional" negotiators deliver on their promises?

Debt Management

Debt management is an umbrella term that refers to all kinds of activities aimed at controlling and reducing debt including, but not limited to, consolidation, counseling, debt repayment, settlement, bankruptcy, deciphering credit reports and credit repair. Debt negotiation is most often confused with debt consolidation and credit counseling, all of which are quite different.

Debt consolidation. Consolidation is the process of transferring a number of smaller debts to a new loan that has a lower payment than the smaller payments combined. Consolidating is not always a bad idea. In fact, under the right circumstances it can be beneficial. But it’s tricky. If debt consolidation is just a delaying tactic that does not address the underlying problem which allowed the creation of too much debt in the first place, consolidation can make things even worse. Used strategically, however, debt consolidation can actually speed the process of getting debt-free without asking creditors for concessions or harming one’s credit report.

Credit counseling. A credit counselor or counseling organization acts as a middleman between you and your creditors. The counselor assesses the situation and then goes to the creditors and pleads for mercy on your behalf. Some creditors are willing to reduce interest rates and fees (not the principal) in an effort to help you avoid bankruptcy. The counselor sets up a payment plan you can handle and commences to manage your debt situation.

Credit counselors typically charge a small fee and also earn a commission from the creditors. Each month you make a single payment to the counseling organization through their debt management program, and they in turn pay your creditors. A good credit counseling organization is a true non-profit, makes payments on time and offers education to make sure that once you are out of debt you will stay that way.

But credit counseling is not all sweetness and light. There is a price to be paid for the forgiveness of fees and reduction of interest rates. Your credit report will reflect that you are enrolled in a credit counseling program. It’s up to future lenders to decide if that is a negative mark or a sign that you took responsibility and chose against bankruptcy.

Debt negotiation. Sometimes referred to as "arbitration," or "accord and satisfaction," debt negotiation involves cutting a deal with a creditor to make a one-time cash payment that is considerably less than the current amount owing. But there’s a small matter of having to come up with a big chunk of cash should the creditor agree to settle.

At first glance this sounds pretty cool: Run up a great big balance and then negotiate a greatly reduced cash settlement. The truth is it is anything but cool. For starters, negotiation and settlement will result in the destruction of your credit report. But there’s more.

How it works. It is important to understand that debt negotiating is not a regulated profession so there are no "rules." Anyone can call himself a debt negotiator. There is no training, no certification or licensing required. And the scariest part? Most debt negotiators require their clients to deposit huge sums into their equally unregulated company "trust accounts" before negotiations can commence.

Basically this is how it works. You hear or read some slick and compelling ad that promises you can really stick it to your creditors by paying a lot less than you owe. You meet with the debt negotiator in person or by phone. You list your outstanding balances, and they come up with an amount they believe your creditors will accept. Typically it’s 50 to 60 percent of the total, and could be thousands of dollars. Next, you must deposit that amount with the negotiator.