Debtor rip-off scrutiny is urged

Unscrupulous counselors squeeze those seeking aid

More policing recommended

Study being released by Senate panel today

March 24, 2004|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

The IRS and the Federal Trade Commission should step up their policing of unscrupulous nonprofit credit counselors that are milking millions of dollars from debtors who come to them for help, a new congressional study says.

The report, Profiteering in a Nonprofit Industry: Abusive Practices in Credit Counseling, is scheduled to be released today by the Senate's Permanent Subcommittee on Investigations.

The credit counselors frequently squeeze debtors by charging high fees for managing repayment of their debts. The money is often funneled to for-profit affiliates of nonprofit counseling organizations.

"We are dealing with people who believe they are in trouble, worried and not sure how they will feed their family," Sen. Norm Coleman the Minnesota Republican who chairs the subcommittee, said yesterday.

"They are being subjected to high-pressure tactics operating under the guise of nonprofits. In some instances consumers ... don't realize their first payment is a payment to the agency and not going to pay off the debt."

Coleman's subcommittee has scheduled a hearing today on credit-counseling abuses.

Among those scheduled to testify are executives from three Maryland organizations, AmeriDebt in Germantown, Amerix Corp. in Columbia and the Ballenger Group in Frederick. Their practices are sharply criticized in the report.

AmeriDebt is battling regulators on several fronts. The Montgomery County credit counselor is being sued by the FTC and Illinois, Minnesota, Missouri and Texas.

The Maryland attorney general's office confirmed yesterday that it has issued a subpoena for Andris Pukke, whose wife founded AmeriDebt in the 1990s and who once owned the company that provided data processing for AmeriDebt.

The industry has changed significantly since its early years in the 1960s, when people struggling with debt could go to a nonprofit credit-counseling agency and get free help, Coleman said.

Only if their problems couldn't be solved through budgeting and education, he said, would debtors be enrolled in a debt-management plan, with the counselor negotiating a repayment plan with creditors.

"It was a good system," Coleman said.

In recent years, as consumer debt has climbed, a new, more aggressive breed of nonprofit counselor has emerged. More than 810 credit-counseling groups have applied for nonprofit status in the past four years.

Many of these new entrants don't offer counseling but push consumers into debt-management plans and charge them excessive fees, according to the report. Frequently, they are affiliated with for-profit businesses that receive tens of millions of dollars annually by providing data processing and other services.

Sen. Carl Levin of Michigan, the ranking Democrat on the subcommittee, said people running these nonprofits tap them in many ways for personal financial advantage.

Levin pointed out that two brothers who are executives at the nonprofit Cambridge Credit Counseling Corp. in Massachusetts each earned about $625,000. Cambridge officials could not be reached yesterday but have said in the past that the compensation is in line with that at other nonprofits and for-profits of comparable size.

The Internal Revenue Service is auditing 50 credit-counseling agencies, including some of the largest, after a storm of complaints from consumer advocates.

The agency has the power to strip credit counselors of their nonprofit status if they act like for-profit enterprises. It can also assess penalties on outsiders who unjustly benefit from their dealings with nonprofits.

"The IRS and FTC should accelerate their enforcement efforts to review suspect credit company agencies and take appropriate action against agencies and others who are violating restrictions on tax-exempt entities or engaging in deceptive or unfair trade practices," the report says.

Proposed legislation to modify bankruptcy rules should also be modified to strengthen protections against abusive practices, it says.

The bill would require debtors to undergo credit counseling before filing for bankruptcy. When Congress including that requirement, it had the traditional credit counselors in mind, Coleman said.

"I would exercise great caution in directing people to credit counseling," Coleman said, noting the abuses his subcommittee has uncovered.

One helpful step would be to keep a list of credit agencies to provide sound counseling to bankruptcy petitioners, the report says.

The report also suggests the creditors should strengthen their standards for the credit-counseling agencies with which they deal, including requiring the counselors to join one of two industry associations that set codes of conduct for their members.

Key recommendations

Accelerate Internal Revenue Service and Federal Trade Commission enforcement efforts

Beef up creditors' standards for counseling agencies with which they deal

Modify pending bankruptcy legislation to include protections for debtors, such as creating a central list of qualified credit counseling agencies.

Modify existing consumer protections or introduce new legislation to protect debtors from unscrupulous agencies.

Source: Senate Permanent Subcommittee on Investigations

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