You’ve seen the ads for “DEBT MANAGEMENT PLANS” claiming to settle $15,000 in credit card debt for as little as $2,500.

Do these programs truly work? If so, will a debt management program make sense for me? Or, are they really a scam?

Do they work? Occasionally. Do they make sense? Rarely. Are they a scam? Only if you don’t carefully read the contract.

Here’s how these plans work.

Upon entering the program you stop making payments on your credit cards and instead start making monthly payments to the plan. Your debt manage/negotiator holds your money, minus his fees of course, until one of your credit card account goes into default. When your account is in default, your debt manage/negotiator will attempt to negotiate a substantial discount from the original amount due. If your credit card company won’t discount the debt, your debt manager will wait until a collection agency buys your account for pennies on the dollar and again attempt a lump sum settlement with the collection agency.

Before you say, “Count me in!” here are a few things you need to know:

1. Debt management firms charge outrageous fees to do something that you can do for yourself.

2. The overwhelming majority of people never complete a debt management program which means that the debt management firm makes an obscene amount of money for doing nothing. Furthermore, these firms never refund the payments made to them even if they provide no services at all.

3. By the time you pay your debt manager/negotiator enough to work out a lump sum settlement or monthly payment plan, the additional interest accrued, late fees, over-limit fees and possibly legal fees often make the lump sum settlement about the same as the original debt eating up any savings realized from the negotiated settlement.

4. Just because you engage a debt management firm doesn’t mean the harassing telephone calls or the embarrassing collections letters stop.

5. Your credit rating will be destroyed throughout this process and may not recover until two to seven years after you complete the plan.

6. Your creditors can and will sue you regardless of your manager/negotiator’s attempts to resolve the debt at a discount. In a tough economy, some credit card companies bring civil actions for delinquent balances as often as they sell them to collection agencies. Creditors like AMEX, Discover and Target sue as often as they sell.

7. Reduction in debt is considered discovered income by the IRS and you may have to pay tax on the amount saved. Your creditors are required by law to send you a 1099-C if they reduce your debt in a settlement by $600 or more.