Debt adviser to limit clients

AmeriDebt will stop enrolling new customers

`Negative publicity' blamed

Service is being sued in two states over fees

October 24, 2003|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

AmeriDebt, the debt counseling service being sued by two states, said yesterday that it will stop enrolling clients and focus on its 92,000 customers because "negative publicity" has compromised its ability to serve new clients.

The Germantown nonprofit, which spent millions of dollars annually on advertising to attract new clients, said it would stop signing up new customers beginning Nov. 1 and suspend its ads on television, radio and the Internet.

It generally takes several years for consumers to go through a debt-management plan such as those offered by AmeriDebt and other nonprofits, and the group hasn't decided whether to close shop when all of its clients finish the program or resume enrolling consumers later, said AmeriDebt lawyer Zynda Sellers.

AmeriDebt employs 50 workers but expects to cut its staff soon to about a dozen and reduce its office space in Germantown, Sellers said. She said she could not comment on whether changes will be made in top management.

The nonprofit will become leaner but will provide a higher level of assistance and education to clients, Sellers said.

Ceasing enrollment is an extraordinary step for one of the largest debt-counseling groups in the country, but the recent spate of bad publicity made it necessary, Sellers said.

"Consumers need to believe in the organization that's assisting them. With all the negative publicity AmeriDebt has received recently, consumers aren't feeling confident," Sellers said.

She said she could not say how much AmeriDebt enrollment had been affected.

AmeriDebt, established in late 1996, is one of hundreds of nonprofit consumer credit counseling groups that have sprung up in the past decade as consumer debt has skyrocketed.

The groups negotiate mostly with credit-card issuers for lower interest rates and the elimination of late fees and other penalties. Debtors make a monthly payment to the group, which pays creditors. In return, creditors pay the groups a certain percentage of the debt they recover from their clients

The industry is largely unregulated, although it is coming under increase scrutiny because of rising complaints.

Last week, the Internal Revenue Service said it has begun to examine some of the nonprofits to determine whether they merit their tax-exempt status. Enrolling consumers only in debt-management plans without providing education and counseling would not qualify for nonprofit status, the IRS said.

Beginning this month, Maryland is requiring nonprofit credit-counseling groups doing business with Marylanders to be licensed by the state and is limiting the amount they can charge consumers.

AmeriDebt has been a lightning rod for complaints about the industry. In February, it was sued by Illinois, which claimed it had charged excessive fees and failed to forward debtors' payments to creditors.

AmeriDebt said it asks for a voluntary upfront contribution of 3 percent of total debt and a monthly contribution of $7 per creditor, not to exceed $70.

Last month, Missouri filed a more far-reaching lawsuit against AmeriDebt, affiliated companies and some executives of related firms. Besides accusing the nonprofit of charging high, hidden fees, Missouri claimed that AmeriDebt was operating like a for-profit company and funneling millions of dollars to affiliates.

"When they marketed themselves like the Red Cross and operated their business like Dracula, we called them on it," Missouri Attorney General Jeremiah W. "Jay" Nixon, said yesterday.

"I think they know we're serious about getting to the bottom of how this complicated financial labyrinth is set up, and I don't think they want to dig a deeper hole."

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