5 tips to find the right debt-relief agency

This post comes from Stacy Johnson at partner site Money Talks News.

You've probably seen the commercials on TV and heard them on the radio: "Debt-free in 24 to 36 months! One low monthly payment!"

These kinds of promises are often a lie. Not all debt-relief agencies are scams, but many aren't going to help you. In fact, they can seriously hurt you by wasting your time, your money, and potentially trashing your credit history.

• Just how bad is your credit score?

Luckily, a new federal rule, which took effect this week, makes life more difficult for companies doing a reprehensible thing -- ripping off consumers seeking help with overwhelming debt. It's the very definition of kicking people when they're down.

Check out this recent news story I did on finding debt-relief help, then continue reading on the other side.

The major new rule may not sound like much. In the words of the Federal Trade Commission: "Consumers trying to settle their debts will be protected by a new rule that prohibits companies that sell debt relief services over the telephone from charging fees before settling or reducing a customer's credit card or other unsecured debt."

But it's a big deal. To understand why, it's important to  understand how the debt-settlement industry works.

Here's how it's supposed to operate in theory:

• The consumer stops paying on credit cards and instead sends monthly payments to the debt-settlement company.
• The debt-settlement company calls the credit card companies and lets them know the consumer is in a debt-settlement program, thus preventing the consumer from being harassed for not paying bills.
• When the accumulated payments grow to an amount sufficient to make a lump-sum offer to settle the debt -- say, 50% of what's owed -- the debt-settlement company negotiates with the credit card company and pays off the debt.

But here's how it often works in real life:

• The consumer responds to an ad, then is talked into a debt-settlement program by a high-pressure commissioned salesperson. 
• The consumer stops paying on credit cards and instead sends monthly payments to the debt-settlement company. Since the consumer is no longer making payments on the bills, his or her already-challenged credit score is now completely trashed.
• The debt-settlement company takes hefty fees from the consumer's monthly payments -- commonly 15% -- even though the company hasn't done anything yet.
• The debt-settlement company doesn't convince the credit card company, or in many cases a collection agency, that the consumer shouldn't be harassed. The consumer receives a tidal wave of threatening letters and phone calls. When he or she tries to get help from the debt-settlement company, nobody responds.
• Because accumulating enough money to pay off the debts in a lump sum will take years, the consumer ultimately buckles under the pressure from creditors, drops out of the program, and agrees to pay the bills, which are now swollen with additional interest and fees.
• The debt-settlement company doesn't care if the consumer drops out because it has already made its money. The card company doesn't mind because now the consumer owes even more. The consumer, however, is in a much worse position: He's endured enormous stress, paid big fees for services never received, and has nothing to show for it but higher debt and a lower credit score.

To understand more about the debt-settlement industry, including a riveting video showing congressional hearings, see "GAO: Debt settlement industry defrauds consumers."

In order to stop the abusive practices I outlined above, starting Oct. 27, debt-relief agencies that solicit by telephone can no longer collect fees until they've performed a service.  In a recent press release, FTC Chairman Jon Leibowitz delivered a clear message to all debt-relief agencies: "If you charge consumers before actually helping them, you will find the FTC and state enforcers knocking at your door."

The new rule comes exactly one month after several others I detailed in "New debt-settlement rules start Sept. 27." An unregulated industry full of scammers is finally getting some law and order -- at least theoretically. But since the FTC can't be everywhere, you still need to be careful.

Here's a recap of the five tips from the video above for finding the right folks to help you with your debt:

Help yourself first. Many times, the most effective person to negotiate your debt isn't a professional. It's you. Call your creditors and simply ask what they can do to work out a payment plan. You'd be surprised how often this works. I detail how to do it in "Can I negotiate debts myself?"

Ignore the ads. The best debt-relief agencies don't waste money on splashy advertising campaigns -- they can't afford to. So how are you supposed to find reputable agencies? Here are two trade organizations representing credit counseling agencies where you can find help: the Association of Independent Consumer Credit Counseling Agencies and the National Foundation for Credit Counseling. (Full disclosure: I have a business relationship with several credit counseling agencies that are members of these organizations and am on the advisory board of one.)

Ask questions. You wouldn't buy a car without asking a lot of questions. Same goes with debt-relief agencies. The most important: What are you able to do for me and how much will it cost? You might also ask if an agency is nonprofit, but recognize that nonprofit doesn't automatically equal honest. Ask how the counselors are trained and if they're certified. Ask if you can get your money back if you're not satisfied.

A good counseling organization will discuss all your options and won't sugar-coat your situation or the proposed cure. If someone is trying to sell you something, you're barking up the wrong tree.

More from Money Talks News and MSN Money:

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• 7 fast fixes for your credit scores

• How to recover from financial ruin