Facing about $19,000 in credit-card debt, Cindy Sexton of Bloomington turned to the Internet for help last summer.

She latched onto a debt-settlement company that she paid $266 a month to help get caught up with her bills. Her "nightmare," as she calls it, started within months.

Sexton was summoned to court twice by the credit-card companies, and her wages were garnished. After numerous calls to the company, she learned that $200 of the $266 was going to administrative and lawyer fees, leaving just $66 going toward an account that would eventually be used to negotiate down her debt.

"In the meantime, you're getting deeper and deeper in trouble," said Sexton, 46, who works as a receptionist in Edina. After paying the debt-settlement company about $800, she ended up filing for bankruptcy.

A law passed by the Minnesota Legislature this spring and that goes into effect Aug. 1 tightens rules for debt-settlement companies, including preventing them from advising consumers to stop paying creditors and charging excessive fees up front. It also caps fees but lets debt settlers get paid more if they base their fee on how much they save the consumer.

"No longer will all the fees get collected before all the work gets done," said Ron Elwood, a staff attorney with the Legal Services Advocacy Project who lobbies for consumer legislation. "Now they'll get the fees when they do the job, and the customer can cancel at any time."

Elwood, who said he helped craft the legislation, said the debt addressed by it is primarily from credit-card bills and medical expenses.

With today's tough economy and rising unemployment, debt -- and where people turn to try to resolve it -- is a mounting problem. Americans carry $2.56 trillion in consumer debt, up 22 percent just since 2000, according to the Federal Reserve. The average household's credit-card debt is $8,565, up almost 15 percent from 2000.

Misleading ads

That leaves more people turning to a growing number of debt-settlement companies, which advertise heavily online and on radio and TV.

Consumer advocates say demand for consumer counseling has skyrocketed along with the number of companies selling such services.

"When you see the ads on TV, it's all apple pie and roses: 'We'll get you out of debt -- pay only half of what you owe,'" Elwood said. "What they fail to tell you is that the settlement doesn't occur for years after the signing of the contract."

Many of the ads, Elwood said, are for what's known as "lead generators" that turn the callers' information over to the actual debt-settlement companies. Under the new law, these "lead" companies will have to make it clear that they don't actually do the work. He said that in addition, the law says the companies need to do a financial analysis of any potential customer and ask, in part: "Do they have enough money to accumulate the amount necessary? Is this a suitable response for this person's debt?"

Debt-settlement companies generally encourage consumers to stop paying their credit-card debt and instead put the money into an account. Once enough money is built up -- often half of the debt -- the company will try to negotiate a settlement with the creditor.

'Financial death spiral'

But consumer advocates say that many of these companies charge large up-front fees and that the debtor is still vulnerable. And they say that the number of cases eventually settled is small.

Consumers need to go into these transactions "with their eyes wide open," said Elwood. Once they sign with a debt-settlement company, many consumers don't realize their bank accounts and wages can still be garnished, they can be sued and have judgments placed against them. And creditors can still call them.

"Debt-settlement companies really put people into a financial death spiral," said Attorney General Lori Swanson, whose office played a prominent role in getting the legislation passed. "They get further and further behind and it's hard to get out."

Best option?

Consumer advocates say anyone in debt and looking for a way out needs to know there's a difference between debt-settlement companies and providers of debt-management services.

"The first coaching debt-settlement companies will give you is to stop paying," said Darryl Dahlheimer, program director at Lutheran Social Service Financial Counseling, which has eight offices statewide and serves 16,000 people a year. "In a debt-management plan, you're always told to deal with creditors and work with them, either directly or through a service."

If a consumer goes on a structured payment plan, most credit-card companies are willing to negotiate a lower interest rate, stop late fees and even report the accounts as current to the credit bureaus, he said. That means the person is actively building good credit while repaying the debt, he said.

Sexton said she wishes she had gone that route in the first place and has empathy for people who experience what she did.

"I feel bad for all the people who feel how I felt -- overwhelmed and looking for some kind of avenue," she said. "And I'm afraid they're going to get screwed over like I did."

Suzanne Ziegler • 612-673-1707