You've seen the ads claiming you can settle your debts for just pennies on the dollar, but Congress wanted to know what is really behind those commercials and ordered an undercover investigation of the industry to find out.
Government accountability office investigators posed as consumers and called 20 companies to ask for help with their debts, and say they ran into abusive, deceptive and even fraudulent activities, which were recorded on tape.
Some companies claimed they could settle your debts for 60 percent of what you owe, while others posed as government programs.
"We help 100 percent of the people who enter this program eliminate their debt," said one debt settlement operator recorded on the Government Accountability Office tape.
"When you are in our program you will not pay any of your creditors anymore," said another debt settlement operator.
When investigators called some sample companies they found exaggerated claims, dangerous advice and misrepresentations.
"The banks received, you know, bailout money last year, I'm sure you saw it on the news," a debt settlement operator said. "There has to be some type of assistance for people on a consumer level also."
William and Holly Haas came to Washington to tell Congress, and other consumers, not to fall for it. The Haas' were looking for credit counseling, but instead a company charged them $3,800 for debt settlement.
Holly Haas said the debt settlement company did "absolutely nothing" for her and testified at a Senate Commerce Committee hearing Thursday that her family is now $16,000 in deeper debt.
"The debt settlement plan does extreme damage to your credit and in our opinion they don't work and shouldn't exist," Haas said.
Haas said she lost more than just money.
"To have somebody take that away, take that trust away, to ruin somebody's credit, to ruin somebody's life. I don't think I'll ever trust like I did," Haas said.
Investigation Into Debt Settlement Companies
Investigators say debt settlement companies charge thousands in non-refundable, up-front fees but only end up settling debts for a fraction of their customers. That's why the government is considering a ban on advance fees.
"My thought is if doing away with advance fees does away with these companies, then that's probably a good thing," Missouri Sen. Claire McCaskill said during the hearing.
An industry representative testified that advance fees would put debt settlement companies out of business and offered to help come up with other solutions.
"We will continue to join as best we are able to do if you allow us that," John Ansbach, from the United States Organization of Bankruptcy Alternatives, said.
"That was a touching closing statement," Sen. Jay Rockefeller, D-W.V., said just before adjourning the meeting. "I guess mine would be, I don't know how you sleep at night."
The Senate Commerce Committee released the names of six companies investigators found most misleading:
A New Beginning Financial & Ministries
Credit Solutions Of America
Freedom Fidelity Management
Procorp Debt Solutions
Web Credit Advisors
We contact all six companies for comment.
Click here to read Web Credit Advisors' statement.
Click here to read Credit Solutions of America's statement.
The other companies did not respond by air time.
Regulators at the Federal Trade Commission are expected to take action to address the debt settlement issue in the next six weeks.
Web Extra Tips to Help Eliminate Debt:
Some consumers have had success approaching their credit card companies directly and offering settlements for less than the total amount they owe.
Some banks have been approaching consumers themselves, offering settlements of up to 70 percent off the amount owed.
One less-drastic alternative is to try to negotiate with your card company to lower your interest rate and drop any fees and penalties that have accrued, rather than reducing the actual principal owed.
There's another lesser-known risk to settling your debts: The card company may report the amount forgiven to the IRS as income you have earned. You will then have to pay income tax on that amount, reducing the cash benefit of your settlement.
CLICK HERE for the Federal Trade Commission's advice on settling your credit card debt.
Additional Comment From Web Credit AdvisorsUpdate: April 28, 2010.
After this story originally aired, Web Credit Advisors contacted ABC News to comment further. The Government Accountability Office report took issue with an operator, speaking on behalf of Web Credit Advisors, who told an undercover GAO investigator, "…we help 100 percent of the people who enter this program eliminate their debt in less than 3 years." In its report, the GAO wrote. "The success rates we heard (during GAO's undercover telephone calls to debt settlement companies) are significantly higher than is suggested by evidence obtained by federal and state agencies. When these agencies have obtained documentation on debt settlement success rates, the figures have often been in the single digits." Web Credit Advisors clarified that "…100% of the people who enter, follow the guidelines and complete (emphasis added) the program are helped to settle their debt." Although, Web Credit Advisors did not disclose the portion of clients who complete its program, the GAO report also cites an industry group, TASC, The Association of Settlement Companies, as reporting that "34.4 percent of consumers participating in a debt settlement program offered by a TASC member company completed their debt settlement programs by settling at least 75 percent of their enrolled debts."
Web Credit Advisors also contends that it has been unfairly used as an example in the GAO report. A spokesperson said: "WCA is a bona-fide, reputable debt settlement company, with hundreds of satisfied clients in the short time the company has operated. Web Credit Advisors has undertaken all necessary compliance processes and is a member in good standing of IAPDA – International Association of Professional Debt Arbitrators (associate member) and USOBA – United States Organization of Bankruptcy Alternatives (associate member). We take our reputation seriously and the service we provide to customers with the utmost integrity."