Know your options if seeking help with debt

— -- The national household debt now totals $13.3 trillion, and although millions of Americans are in financial distress, not many are seeking help. Some worry that they'll get ripped off by debt scams. Others don't think they can afford to pay for the advice they need.

For those getting crushed under the weight of what they owe, the key to taking advantage of debt relief is avoiding traps and understanding your options, because not all of them can fix every problem. And you should know about industry reforms. What are the different types of debt relief — and factors you should keep in mind?

Credit-counseling agencies

Non-profit credit-counseling organizations can offer free or low-cost education and counseling services for those whose debts are getting out of hand but aren't yet financially crippling. If you're living paycheck to paycheck and aren't sure what to do, counselors can provide basic advice. Without trying to sell you something, they can show you how to manage your finances by cutting back on spending and keeping up with bill payments.

Debt management plan (DMP)

If you're falling behind on your bills, the credit counselor can then suggest other options. One thing that credit-counseling agencies themselves can offer is a DMP.

Although you can contact your creditors and try to set up a DMP on your own, if you're under extreme stress, you might want a reliable credit counselor to handle it for you. They'll negotiate with creditors for a lower monthly payment and lower interest rates, and sometimes can get creditors to waive late fees and over-limit fees.

During the recession, the traditional DMP didn't help many consumers because they owed too much money. The National Foundation for Credit Counseling (NFCC) came up with another repayment plan, "Call to Action," that most financial planners offer to provide deeper concessions for consumers who need it.

For the traditional DMP or Call to Action, you have to be able to make regular monthly payments to the counseling organization. But some consumers are so far behind, they might not even be able to handle those payments.

To address that, the Association of Independent Consumer Credit Counseling Agencies (AICCCA) is working with creditors to develop a program in which debtors pay less than the full balance without having to resort to a debt settlement plan.

To qualify, consumers would have to show their expenses and spending patterns over time.

Debt settlement

A more serious option is debt settlement. This is an industry that developed to fill in the gap between credit counseling and bankruptcy, says Joel Winston, director of the division of financial practices at the Federal Trade Commission. "These are for people who can pay part of their debt but need a substantial reduction before they can do that."

For-profit debt-settlement firms claim that they can negotiate with creditors to reduce the amount you owe. But there is no guarantee that creditors will agree to partial payment. The industry has come under so much criticism that last year, the FTC approved a rule that prevents debt-settlement companies from charging upfront fees before the settlement was actually negotiated.

Since then, the industry has been in flux. The association that represents debt-settlement companies says its membership has declined from more than 200 before the FTC rule to about 35 now. "All those who jumped into this industry because they thought it was a short-term way to make money are now leaving," says Andrew Housser, a board member of the Association of Settlement Cos. and CEO of Freedom Debt Relief.

The rule applies to telemarketing sales. A number of companies have tried to find a loophole or ignored the changes, and the FTC is preparing some enforcement actions, Winston says.

Bankruptcy

Bankruptcy filings are considered a last resort because of the serious damage they do to your credit history. Chapter 7 bankruptcy typically can wipe out most debt, prevent debt garnishment from your wages and give you a fresh start. Chapter 13 bankruptcy sets up a plan to repay debts in full or part over three to five years.

A change in the law in 2005 has made bankruptcy filing more difficult. Some people are deterred because there's more paperwork, it's more costly, and it requires pre-bankruptcy credit counseling, as well as debtor education, prior to discharge, says Robert Lawless, law professor at University of Illinois.

What will debt relief cost?

Ask about fees and ask to have it all in writing. Credit counselors may not charge any fees or only about $20 for basic advice and education, says the NFCC. Debt-management fees are typically less than $75 to enroll in and less than $50 per month, according to the AICCCA. But it also says that some credit-counseling agencies charge up to $200 to $400 to enroll in a DMP.

Debt settlement might require you to put money into a dedicated bank account that's administered by a third party. Some charge a percentage of the total debt — such as 15% or 18% — while others charge a percentage of the debt savings or a flat monthly fee. Debt settlement can cost more than hiring a lawyer to file for Chapter 13 bankruptcy, says a recent report by the Federal Reserve Bank of Philadelphia.

How to protect yourself

Choose a credit-counseling agency that's affiliated with the non-profit NFCC or AICCCA. You can make sure they're a member by going to the organization's website. There also are reputable for-profit agencies.

Before you sign up with a debt-relief company, it's wise to do some research and see if many complaints have been filed against them. You can check with the Better Business Bureau, the IRS and the FTC.

Because bankruptcy filers must go through credit counseling, the Justice Dept. has a list of approved credit counseling agencies that you can find. Just go to www.justice.com.

And the new Consumer Financial Protection Bureau will be monitoring debt-settlement companies, and it is developing educational materials and consumer tips about debt relief, says Jen Howard, the bureau's spokeswoman.