It is both sad and infuriating that con artists are targeting the people who can least afford to be scammed; those deeply in debt desperately looking for a way out. The scammers frequently call themselves "debt settlement" experts with special expertise in getting creditors to forgive all, or at least part, of consumer debts and make the customer "debt-free." The problem is, and the debt settlement industry admits this, about two-thirds of clients get no relief at all. Federal and state regulators say he success rate is more like 10 percent.
The Better Business Bureau calls debt settlement "an inherently problematic business" and New York City's Department of Consumer Affairs called in "the single greatest consumer fraud." In return for steep fees, debt settlement agencies saddle debtors with even more headaches than they had before. For example, a debtor will often be told to stop making payments in order to force the creditor to accept a settlement. In fact, the consumer gets stuck with fees and penalties, a lower credit score, and aggressive collection efforts. It's also likely that a creditor will refuse the debt settlement proposal and file a lawsuit. The debt settlement company walks away, leaving the debtor deeper in the hole and facing an expensive legal action as well.
In the unlikely event that a consumer actually succeeds in getting a debt reduced, there's another trap that the debt settlement people probably don't talk much about. The Internal Revenue Service can tax the amount of the forgiven debt. Some may think, "There must be at least some honest debt settlement companies out there." The companies may be honest, but their business models are completely flawed; all of them, the honest ones and the scammers. All require consumers to deliberately default on their debts, a classic case of jumping out of the frying pan and into the fire.
Source: National Association of Consumer Bankruptcy Attorneys, "The debt settlement trap," Oct. 2012