Debt counseling leads to deeper credit woes

Money: States and federal agencies respond to rising complaints about the costly practices of some nonprofits.

November 14, 2003|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

Thousands of Americans in debt over their heads are turning to nonprofit credit counseling agencies to help them avoid bankruptcy and return to solvency. But for many, that move is leading to more financial woes.

A new breed of credit counseling agencies is more interested in making a buck off troubled consumers than in helping to rescue them from financial distress, consumer advocates say.

These agencies are charging exorbitant fees, failing to disclose who is profiting and how from rescue plans and, in some instances, failing to pass debtors' payments on to creditors on time, experts say.

At the same time, some of these nonprofit agencies are acting more like for-profits by paying executives lavish salaries or steering millions of dollars in business to for-profit companies run by friends or relatives, critics say.

"The IRS has given out tax-exempt status to these companies without really checking whether they are filling their tax-exempt purpose," said Joseph Rooney, deputy commissioner of the Division of Financial Regulation, which regulates the groups in Maryland.

"The nonprofit status is a linchpin. In the wrong hands, nonprofit status is a license to steal," said Eric S. Friedman, investigative administrator for Montgomery County's Division of Consumer Affairs, who has become a national authority on credit counseling groups.

Alarmed by a rising tide of complaints, consumer advocates are pushing for reforms.

Congress is considering legislation that would require credit counselors to be registered and would force greater disclosure of fees and relationships with for-profit affiliates.

States also are pursuing regulation. Maryland began licensing nonprofits last month, despite objections from some players.

The Internal Revenue Service and the Federal Trade Commission issued an alert to warn consumers about unscrupulous counseling agencies last month, and the IRS said it is stepping up reviews of whether counselors merit nonprofit status.

Focus on AmeriDebt

Much of the recent criticism has focused on AmeriDebt, one of the largest debt counselors in the country, which has its headquarters in Germantown, Montgomery County. It spends millions of dollars advertising its services, its annual report to the IRS shows.

Illinois and Missouri sued AmeriDebt this year, accusing it of behaving like a for-profit business and charging high and hidden fees that push clients deeper into debt.

Disputing the allegations, AmeriDebt said it has helped more than 300,000 clients and given free service to tens of thousands.

Three weeks ago, AmeriDebt said it would stop enrolling new clients because "negative publicity" made it difficult to serve new customers.

The nonprofit said it would cut its staff of 50 to about a dozen and focus on serving 92,000 current clients.

"They have become the poster child for bad credit counseling," said Travis Plunkett, legislative director for the Consumer Federation of America.

"We think there are problems that go well beyond AmeriDebt."

Service by phone, online

Credit counseling has been around for decades, but much of the help that was once offered face-to-face is now given by phone or online.

The agencies typically negotiate reduction or elimination of interest charges and late penalties with credit card companies. Debtors make monthly payments to the agency, which pays the creditors.

Card companies help fund the agencies by paying "fair share" - a percentage of the debt recovered. Until the 1990s, fair share was 15 percent.

Traditionally, credit counseling agencies have poured any surplus funds into free counseling and education programs.

The counseling industry began a period of rapid growth in the 1990s, as card debt soared and the Internet expanded the reach of counselors.

Now, Americans carry about $731.5 billion in card debt, more than triple the amount in 1990, and the number of counseling agencies is estimated at 1,500, up from 200 a dozen years ago.

Experts differ over what proportion of this new army of counselors is overcharging and self-dealing.

"Every industry has bad players. But usually they are the exception to the rule. In this industry here, it's just the opposite," said Friedman.

Jim Godfrey, executive vice president of the Consumer Credit Counseling Service of Maryland and Delaware, sees it differently.

"There are a lot of really good counseling services that exist across the country," he said. "The whole industry is being painted with the same brush."

As counseling has grown, its economics have changed. With more debtors making payments through plans, creditors saw their fair share expenses rising and began slashing payments to nonprofits, credit experts said. Today, the average fair share is 6 percent to 8 percent, experts said.

Joint study of industry

With that income down, credit counselors have trimmed services and begun charging fees, the National Consumer Law Center and the Consumer Federation of America reported in a joint study on the industry this year.

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