Debt manager can add to debtor's burden


Dollars & Sense

March 31, 2002|By Eileen Ambrose

THE balance on credit cards for Caryn Mitchell and her husband had reached $21,600. Something had to give, so two years ago she enrolled in a debt-management program offered by a nonprofit she found on the Internet.

After more than a year into the program, Mitchell received a $20,000 loan from a friend and instructed OmniDebt Solutions Inc. to use most of the money to pay off her cards.

Weeks passed, she said, and a creditor called to say the checks from OmniDebt were returned because of insufficient funds. OmniDebt's checks to the card companies, Mitchell said, bounced four times.

"I was scared," said the 27-year-old pediatric nurse from Odenton. "I had fees. I had interest. It was way out of control."

With the help of the state, Mitchell got her money back, although she said OmniDebt still owes her about $1,500 for penalties and interest that had accrued on her accounts.

Mitchell's case prompted legislation in the state Senate to require debt-management groups to be licensed and bonded before doing business in Maryland. The legislation passed the Senate last week.

Consumer advocates acknowledge a need for credit counseling, but they warn that debtors must be careful when choosing credit counselors and debt managers. The industry is largely unregulated. And as the number of credit counselors has grown in the past five years, so has the number of complaints about them.

The number of credit-counseling companies is estimated at more than 1,300 nationwide, up from 200 in 1990. Maryland's Office of the Commissioner of Financial Regulation estimates there are up to 75 debt-counseling groups in the state, and up to 1,000 companies promote themselves over the Internet or on television.

Nationally, the Better Business Bureau received 404 complaints on credit counseling in 2000, the latest figures available, up from 353 the year before. Most complaints, according to the BBB, involved misrepresentation of services, nondisclosure of fees and payments not being forwarded to creditors, which can end up damaging debtors' credit reports even more.

Generally, debt-management and credit-counseling groups negotiate with unsecured creditors to cut or eliminate interest rates and late fees. The debtor makes one monthly payment to the credit counselor, which then pays the creditors.

Eric Friedman, investigative administrator for Montgomery County's Division of Consumer Affairs, said he's concerned about the "new breed" of debt counselors who market themselves as nonprofits and then solicit high "voluntary contributions" upfront from consumers.

"Their motive is to sign up as many people as possible," he said, adding that the groups have little incentive to keep consumers in the repayment program once they receive the initial contribution.

Friedman also questioned whether some of the groups are truly nonprofits when they pay a large percentage of their revenues to a company they have ties to for data processing or other services.

Mitchell said one of the reasons she trusted OmniDebt was that it was a nonprofit. "Some are good companies," she said. "I just chose the wrong company."

OmniDebt Solutions in Columbia blamed the initial problem with Mitchell's account on a vendor's computer troubles. The company said that after it reissued the checks, which were again returned, it discovered the checks were "cut off of the wrong client funds account." Around the same time, OmniDebt said, it decided to stop servicing debt-management accounts, which delayed the return of Mitchell's money.

The company said it returned all of Mitchell's money. OmniDebt offered to pay any late fees or penalties, an offer that Mitchell's husband declined, the company said. The company said it will renew the offer to Mitchell.

Seventeen states regulate credit-counseling agencies, according to the Association of Independent Consumer Credit Counseling Agencies. Others, including Maryland, permit nonprofits to do debt management provided that they don't charge fees.

For decades, the industry leader has been the nonprofit Consumer Credit Counseling Services, offering budgeting and financial education. It negotiates a repayment plan with creditors in about one-third of the cases, said Bill Cullinan, interim chief executive of the National Foundation for Credit Counseling, the association for CCCS agencies.

For years, nonprofits were supported by creditors, paying 15 percent of recovered debt, a better deal for creditors than if the consumer filed for bankruptcy. In recent years, though, that percentage has fallen to 8 percent or lower, Cullinan said.

To finance their operations now, some nonprofits also ask for "voluntary contributions."

Some CCCS offices still don't ask for contributions from debtors, while others are beginning to request a one-time contribution averaging $26 for budgeting, plus $11 a month for the debt-management program, Cullinan said.

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