With financial times getting harder, more and more of us are finding ourselves stuck with high credit card bills, student loan debt, mortgage debt, auto loan debt, etc. As we plunk down up to 23% in interest charges, on top of trying to pay off our statements, is it any wonder that many of us are seeing no debt-free future in sight?

Of course, wherever there is a problem, there are entrepreneurs trying to “solve” that problem. Lately, debt consolidation companies have been multiplying in number like mosquitoes in a bog. Daily, almost hourly, you might see ads proclaiming “Become Debt-Free Today!” and “Get Rid of Your Debt Now” on TV or online. But do these ads, and the companies that push them, really deliver on their promise to make you debt-free?

Let’s first look at the process of debt consolidation. When you start working with a debt consolidation agency, you fill out a 1-2 page application regarding your current debts, assets, and other financial information. The application is sent to a network of banks with which the agency collaborates. You then receive a reply either in the mail or online from the banks that have reviewed your application. Several payment plans are laid out for you, each one with slightly different terms. The terms are as follows:

Credit amount. Depending on your situation and credit rating, creditors will offer you different loan amounts.

Interest rate. Different interest rates will be applied to different loans. Typically, you want to take the loan with the lowest interest rate overall.

Number of payments. Creditors will offer you different loan repayment terms. Oftentimes, a longer term loan is countered by a higher interest rate.

The final goal of debt consolidation is to merge, or consolidate, all your debts into one monthly payment. So, instead of you writing out 20 checks a month for your various credit card statements, personal loans, auto loans, etc., you have just one creditor to pay. This creditor, which is usually a bank, has worked with your chosen debt consolidation agency to total your outstanding debt and pay it off. In turn, you now owe only this single creditor. If all has gone well, your monthly payments to your creditor carry a much lower interest rate than the credit cards and other loans you carried before.

Sounds simple, right? However, what many debt consolidation agencies won’t tell you is that there are fees and other charges involved with this service. Also, not all debt is covered by debt consolidation. Finally, some debt consolidation companies may end up lowering your credit rating. So, if you are planning on taking a debt consolidation loan, here are some things to keep in mind:

Fees. The way most debt consolidation companies earn their bread and butter is by charging you an up-front fee for their services. While such a fee is to be expected, many companies go even further and tack on a processing fee for every monthly payment you send to them. The way this works is by the consolidation agency asking the creditor to pay it a given percentage of the loan. The creditor may agree, taking off a portion of your payment and giving it to the agency. This leads to you paying off your debt for a longer period of time.

Processing fees can get quite hefty, going up to 15% of the monthly payment. So, if you are sending in a monthly payment of $600 to the consolidation agency, you might actually be contributing only $521 to your actual loan, with the remaining $78 going to the agency.

Interest. Every loan carries with it a specified interest rate. However, it is imperative that your new loan not carry a higher interest rate than the sum total interest rate you were previously paying. If you need help calculating what your previous interest rate was, click on MSN’s Money Debt Consolidator.

Taxes. If your debt consolidation agency reduces the total debt owed to your creditors, then the amount forgiven is actually taxable as income. The IRS refers to this forgiven amount as the “Discharge of Indebtedness” (DOI) and sends you a 1099 form for the difference.

Student loans. Some debts, like student loans, are federal loans and therefore not covered under debt consolidation plans. If the majority of your debt is due to student loans, debt consolidation will not help you very much.

Credit score. Unscrupulous consolidation agencies may collect your monthly payment, take their fees immediately, and place the rest of the money in a bank account. When your creditor places you on default status for not having made your monthly payment, the consolidation agency will then propose to pay a “lump sum” payment on it. While this keeps your consolidation plan running, it lowers your credit rating. Too many default payments result in you having a bad credit score, even though you are making your own payments on time.

In summary, while debt consolidation agencies can help you get your financial life back on track, they can cost you quite a lot in fees and other charges. Before you call a debt consolidation agency, find out if you can arrange for a consolidation yourself. Call every one of your creditors and explain your financial situation to them, then negotiate for lower interest rates and amounts. Many of your creditors will be more than happy to work with you and lower your total interest rate and/or amount owed. Others might even extend a no interest rate promotional period to you. Once you negotiate a better deal, stick with a budget so that you can fully pay off your debts.