Many of the much-advertised debt settlement companies are fleecing the public and leaving consumers worse off than when they applied to the debt companies for help, says the National Association of Consumer Bankruptcy Attorneys (Nacba).

The association issued a consumer alert at a press conference Wednesday calling the situation "the number one threat facing America's most deeply indebted Americans."

Only one in 10 of the people who go to debt settlement companies come out of the process debt free, according to statistics compiled by the Department of Justice, says North Carolina bankruptcy attorney Ed Boltz, who is a Nacba board member and incoming president. Some consumers may end up with reduced debt.

"But most are left more deeply in debt and with worse credit scores than when they started," he says.

"Bombarded with slick radio and Web advertising falsely promising a smooth road to being debt free in a short period of time, these companies prey on the most desperate victims of the economic downturn," he adds.

Many debt settlement companies charge steep fees to set up an account and then charge monthly fees and end up taking some of the money that was supposed to be paid toward the debt, says Trisha Connors, a bankruptcy attorney from Glen Rock, N.J., and an Nacba member.

"Over the last three years, I have worked with 12 different for-profit debt settlement companies and over 25 clients who came to me after their debt settlement program failed to service them," Connors says. "The results with each client were the same: exorbitant fees being paid, settlement (at best) on one small credit card debt, and mounting late fees and penalty interest charges on the unsettled debts. When clients informed the debt settlement companies of their desire to exit the program, the firm kept all or most of the accumulated savings for debt reduction as fees."

Consumer advocate Ellen Harnick of the Center for Responsible Lending warned consumers to beware of debt settlement companies that tell a person to stop paying bills and credit-card debt because companies supposedly will not negotiate with someone who is still making payments. Not making payments will lead to fees and lawsuits against the debtor.

Also consumers should not believe companies that say they can remove negative information that is accurate from credit reports, the attorneys said.

Richard Thomson of Rialto, Calif., related his experience of being $89,000 in debt and turning to a debt settlement company that promised to settle his debt for $39,000. He says he signed a contract and paid the company $1,800 a month, but none of his debts were settled. Instead, he ended up with a total of $112,000 in debts and a company that won't return his telephone calls or letters. The settlement company ignored legitimate offers from some companies to settle his debts, he says.

Although 41 state attorneys general have cited debt settlement companies as a serious problem and some have filed civil suits against them, criminal action is seldom taken, Connors says, despite the fact that there are a half million people with $15 billion in debt involved in debt settlement programs. One in eight people have $10,000 or more in credit card debt, Nacba says.

The IRS has cracked down on some nonprofit debt settlement companies, and some lawyers who have associated themselves with these companies have faced disciplinary proceedings.

As in Thomson's case, many debt settlement firms associate with a lawyer or law firm to give them legitimacy. Many that claim to be nonprofits are actually not and some nonprofits are not legitimate, Nacba says.

Consumers can take some steps to protect themselves and to settle their own debt problems in some cases, Nacba says. The federal government maintains a list of government approved credit counseling organizations at, so if a company says it is government approved, check it out, Boltz says.

"If you have cash on hand and it is a single credit-card debt that you owe, you can negotiate with the credit card company," Connors says. "They will want 25 percent to 70 percent of the total, so you will need that much. Be sure to get a written statement from the credit card company that this is what they are accepting."

Bankruptcy is a last resort only for those who cannot pay, Boltz says, and are facing foreclosure or other consequences. There are two kinds of personal bankruptcy, Chapter 7 and Chapter 13, where some personal property cannot be touched.

"There is no one-size-fits-all solution," he says.

-Karen DeMasters