In a time of widespread job losses and rising credit-card delinquencies, the radio ads are ear-catching: "Settle your outstanding debt for just pennies on the dollar — without filing for bankruptcy!" That's largely true, although "pennies on the dollar" may be stretching things a bit.

But reaching a debt settlement isn't quite as easy as the ads imply. A settlement works only if you qualify and only if everything goes just right.

As many as 2,000 debt-settlement (or debt-negotiation) companies operate in the U.S. They promise, as their ads say, to negotiate with creditors on a debtor's behalf — but not in the same way that nonprofit credit-counseling firms do. Credit counselors work with creditors to produce repayment plans with reduced interest rates and lengthened payback terms.

In contrast, the stated goal of debt-settlement companies is to persuade creditors to accept a one-time discounted lump-sum payment in fulfillment of a debt. (Generally, debt-settlement companies deal only with unsecured debts, such as credit cards, personal loans, and medical bills.)

Most creditors, however, won't consider such a settlement until a debtor is at least three-to-six months behind on payments. For clients not quite that bad off yet, many debt-settlement firms offer this simple strategy: stop making payments. As the debtor falls farther behind (so the argument goes), the creditor will be more willing to cut a deal.

Rather than making monthly payments to the creditor, the debtor makes them to the debt-settlement firm. That money — minus (sometimes hefty) fees — goes into an escrow account, for use when a lump-sum settlement deal is ultimately reached.

Leaving aside the moral/ethical implications for a moment, this process can work — unless it doesn't. Potential problem #1 is that as the debt goes unpaid, late fees and interest pile on, while the debtor's credit score plunges. (And, of course, a creditor who isn't getting paid is likely to get testy.)

Potential problem #2: the debtor can't know for sure if the debt-settlement firm will actually strike a deal with the creditor. It's possible that the creditor may be unwilling to work with the debt-settlement firm at all.

Potential Problem #3 (related to 1 and 2) is that during the time the debtor has stopped payments and is building up the lump-sum-payoff fund, the creditor might initiate legal action. If that happens, the debt-settlement company will drop out of the picture because it has no right to represent the debtor in court.

In other words, if things go wrong, the debtor could end up with more debt, an angry creditor, a severely damaged credit score, perhaps a lawsuit — plus be out hundreds (maybe thousands) of dollars in fees.

Still, the idea of debt settlement has merit — in certain, limited cases. Attempting a settlement might be the best approach for a debtor who is already way behind and has little or no prospect of recovery short of bankruptcy.

In such cases, a creditor would often rather settle for a discounted lump-sum than see the debtor go bankrupt. Under a Chapter 7 bankruptcy, the creditor would recoup none of the debt; under Chapter 13, the creditor would get his money back very slowly.

(Of course, for someone mired in debt, finding funds for a lump-sum payoff isn't easy. The debtor may have to sell a car, cash out a retirement account, or find a generous relative. The debtor will also have to consider the tax cost; any forgiven debt that exceeds $600 is considered taxable income.)

Although debt-settlement companies have helped some debtors, this is definitely a "let-the-buyer-beware" area. The field of debt settlement is replete with firms that appear to be little more than scams. In recent months, attorneys general in Illinois, Missouri, and Texas have filed "deceptive practices" lawsuits against several debt-settlement companies. Some firms, it is alleged, have simply pocketed client fees and monthly payments without ever undertaking negotiations with creditors. In May 2009, New York's attorney general launched a nationwide investigation of debt-settlement firms.

For its part, the Association of Settlement Companies (TASC), a trade group that represents about 30 percent of settlement firms, says it's wrong to paint the industry with a broad brush. The TASC has complained to the National Council of Better Business Bureaus about the BBB's practice of downgrading all debt-settlement companies because of general concerns about the debt-settlement business. According to Credit.com, the BBB has offered to review its grading system if TASC members can document good business practices.

Meanwhile, some consumers — attempting to avoid high fees and unscrupulous companies — are taking matters into their own hands. They're trying to negotiate debt settlements themselves with help from ZipDebt.com, a site that sells a "Debt Negotiation Training Program."

Others are going the more traditional route: working with a nonprofit credit-counseling agency to set up a debt-management plan (DMP). A DMP helps consumers pay their debts (in full) over 36-60 months. DebtAdvice.org, site of the National Foundation for Credit Counseling, offers a searchable database of such counseling agencies.