You’ve probably been inundated with at least a thousand or more debt consolidation ads by now, all promising that you can become debt-free in a matter of hours to days. You know those ads: "Erase Your Debt Today!", or "Got Debt? We Can Help!"

However, aside from making big splashy ads, how does the debt consolidation industry really work? Can you really erase or at least reduce your debt by working with a consolidation agency?

First of all, let’s look at how debt consolidation works. While I do write more in detail about this process in my article, The Truth Behind Debt Consolidation Loans, here are the basics:

1. You fill out an application.

2. The debt consolidation agency sends your application to candidate creditors (usually banks).

3. The agency sends you a list of creditors and their loan terms.

4. You accept one creditor and agree to their interest rate, fees, and other terms.

5. The creditor pays off your other creditors.

6. After a period of time and X number of payments to your creditor through the agency, you are declared debt-free.

So, if debt consolidation is this easy, why not do it? Especially when some agencies can even lower your original debt (via debt forgiveness), it would seem that everyone should be going through an agency- right?

Well, the truth lies, as it usually does, somewhere in between. While I’m not saying that debt consolidation cannot help certain people, it is frequently mired in unnecessary fees, higher than expected interest charges, and unmentioned surprises like taxes. There is even the possibility that it can lower your credit rating!

Here are the biggest detractors of debt consolidation, as far as I see them:

1. Hidden fees. It’s understandable that a business needs to make a profit for its services, which is why most debt consolidation agencies will charge you a fee after your application is processed and you’ve agreed to work with a particular creditor. However, many unscrupulous agencies will charge you additional fees, such as a processing fee, for every payment you send to them. Processing fees can run upwards of 15% of your total payment, undoing all the money you supposedly saved when signing on for debt consolidation.

2. Interest. Are you absolutely sure that the agency negotiated for an interest rate that is lower than the combined interest rate you were paying to your creditors? Before you sign on that dotted line, make sure you are not paying more interest.

3. Taxes.  If your agency is able to lower your debt through debt forgiveness, that forgiven sum is taxable as income. This is something to keep in mind when you suddenly see a 1099 form in your mailbox.

4. Miscellaneous Debt. Not all debt can be reduced or consolidated. For example, student loans are federal loans, and are therefore not included within debt consolidation. Child support payments, as well as criminal or court fees, are also not included.

5. Lower Credit Rating. Many debt consolidation agencies have the habit of taking your monthly payment and placing it into a bank account (where it can draw interest for them). Oftentimes, the money is not withdrawn and paid to your creditor until a notice of loan default goes out to the agency. Even though you’ve done your part, paying your bill on time, the agency has been sitting on your cash until the default. If this happens often enough, you can be sure that your credit rating will take a hit (or two, or three).

So, if you don’t take out a debt consolidation loan, what options are left? Aside from declaring bankruptcy (which has its own problems), I advise that you take stock of all your debts, the interest rates you are paying, and how much you actually owe. Then, pick up the phone and start calling all your creditors. Explain your financial situation and ask if your creditors can either lower the amount owed, reduce your interest rate, or hopefully even do both. What you are negotiating here is essentially what your debt consolidation agency would be negotiating, except for a much smaller fee ($0.00!).

Some of your creditors may refuse to lower your debt amount and/or interest, but do not despair. Try calling them again in a few days; you’ll be amazed at what a little persistence can accomplish. Always maintain your cool and be courteous.

Also, consider getting a home equity loan or a mortgage refinance. The interest rates on equity loans and mortgages have been dropping sharply as of late, and you may end up paying a lot less for these options than for a debt consolidation loan.

If this is not enough, then go meet with a attorney- after all, most initial consultations are free anyway. Have your attorney look at your financial situation and advise you. Even if the advice is to file for bankruptcy, at least you’ll know that it’s the best course of action. However, in most cases, you’ll be able to avoid the "B" word and find a way out.