GAO: Some debt-settlement schemes worse than useless

The U.S. Government Accountability Office last week announced the results of an  undercover investigation of the debt-settlement industry that it conducted at the request of a Congressional committee concerned about allegations that such companies commonly charge fees in advance of settling debts, sometimes without providing any services in return.

In fact, those were exactly the problems we warned about in a March 2009 Consumer Reports story that identified high-fee debt settlement companies as one of five financial traps consumers should beware of in the wake of the economic meltdown.

Posing as consumers, GAO investigators called 20 debt-settlement companies, asking about their services. They found that 17 of the companies collected fees before settling debts, a practice that the Federal Trade Commission has now proposed banning. The GAO concluded that some debt-settlement companies did indeed engage in "fraudulent, deceptive and abusive practices that pose a risk to consumers."

Among egregious cases the report cites:  A New York couple was touted as a debt settlement success story by an Arizona company even though the fees it charged plus the settled credit balance actually totaled more than 140 percent of what the couple originally owed. And a North Carolina couple took second jobs as janitors and filed for bankruptcy in an attempt to save their home from foreclosure after paying $11,000 to two Florida companies for debt-settlement services they never delivered.

You can even listen to excerpts from those undercover phone calls, which clearly demonstrate the scam tactics some debt-settlement companies use, including falsely claiming that the services they offer are part of government bailout programs designed for consumers. Since direct mail and radio ads offering such false promises still abound, making the GAO tapes publicly available may help debunk that propaganda and spare debt-strapped consumers from further heartache. —Andrea Rock