Anatomy of a debt-relief scam

PEOPLE ARE SO desperate to get out of debt that they will believe anything and anyone promising relief. They often turn to debt-relief companies that promote plans that supposedly can solve their problems. But for many, not only does the relief not come but the steep cost of the plans - sometimes thousands of dollars - can dig them in deeper.

Recently, the Federal Trade Commission announced a $7.9 million settlement with one debt-relief operation that the agency said scammed people with false promises. The company waived its rights to "challenge or contest" the charges, according to the settlement.

What the FTC found was troubling. And if the right knowledge is power, let's look at the anatomy of how this one scam worked.

The promoter: DebtPro 123. Unfortunately, this company is not alone. Just look for company names intended to lure you into thinking that they feel your pain and want to help eliminate your debt in just a few short years.

The pitch: According to the FTC complaint, DebtPro 123 told folks that its "debt resolution program would completely resolve consumers' credit card and other unsecured debts (including department store accounts, personal loans, medical bills, student loans, and accounts with collection agencies)."

It also told consumers: "DebtPro will reduce a client's total debt by 70 to 80 percent on average including all fees" and "With settlements as low as 10 percent, this means when all is said and done, a client's savings could be as much as 20 cents on the dollar including our fees."

Now really, doesn't that statement sound too good to be true?

And it was.

What would you say if you were told this? "With honest and informative advice, outstanding customer service, and a proven debt settlement process, we can ensure our clients become debt-free quickly and comfortably and get back on the path of financial freedom."

I homed in on two words: "quickly" and "comfortably."

Unless you come into some big bucks, the process of paying down your debts is long. It is painful. And if someone tells you different, don't believe it.

Oh, and there was the debt calculator to help the unbelievers. It was designed to back up the ridiculous claims of a quick debt reduction.

The two phases of the program: In phase one, customers put money in a "Creditor Fund/Settlement Account." They were told they needed this pot of money for negotiations with their creditors. In phase two, customers were assured that the company was working on their case to get all their debt terms changed.

During these phases, customers were advised to stop paying their bills and to stop all communications with their creditors. Bad move. Often in these cases, people find out later that nothing was being done on their behalf and that fees, interest and penalties had been piling on while they waited on relief.

The FTC complaint said DebtPro made reference to its "legal department." And, in phrasing that's mimicked by other such companies, DebtPro told its clients: "The attorneys will communicate directly with your creditors and debt collectors via the mail and telephone. They will audit your bills and the collection methods being used by the creditors to determine if your consumer rights have been violated."

Other promises: Your credit will be better because the firm will work to remove negative information from your credit files. Except it failed to make clear that if the information was true - that you didn't pay your bills as agreed - this information can't be removed. By law, most negative credit information can stay on your reports for seven years.

The real plan: Make money off desperate people. "For many consumers, more than half of their monthly payment went toward defendants' fees," the FTC said. "For consumers who were in the program longer than 18 months, defendants also charged a $49 monthly 'maintenance fee.' "

The failed promises: Debts weren't reduced quickly. In fact, in many instances the debt-relief company didn't start settlement negotiations until after the client had received letters from creditors warning of an impending lawsuit for failure to make debt payments.

Settlements weren't significantly less than what was owed. Negative information was not removed. And there was "no legal department, 'legal in-house counsels' or any attorneys on staff," the FTC found.

People ended up with more debt, some lost their homes, and others had their wages garnished or had to file for bankruptcy protection.

Now that you know the inside deal, don't get suckered into this type of debt-relief scam.