How to find advice on debt that won't make it worse

PERSONAL FINANCE

Your Money

April 04, 2004|By EILEEN AMBROSE

CREDIT CARD debt is at a record, and so is the percentage of consumers behind on their card payments.

Unfortunately, confusion about which credit counseling agencies consumers can trust might also be at an all-time high.

The credit counseling industry, which was created decades ago to help people manage their debt to avoid bankruptcy, has come under increased scrutiny in the past year by federal and many state regulators after consumer complaints soared.

It's not clear how many agencies are shoddy, say those who have studied the industry. And while it's good that consumers are more on guard, legislators and consumer advocates are concerned that people hearing the bad stories might be confused about where to find good help -- or might avoid getting it altogether.

"People are more suspicious. A lot of people are getting the negative message. They aren't necessarily getting the message that there are still some good ones out there," said Deanne Loonin, a staff attorney with the National Consumer Law Center, which published a critical report on the industry last year. "It's certainly understandable that people are confused right now. There are really no easy answers."

Some agencies are accused of playing up their nonprofit status to gain consumers' trust. Critics say the agencies then charge debtors hundreds and even thousands of dollars in upfront fees, with consumers not realizing that the money goes to the agency and isn't forwarded to creditors.

Agencies sometimes extract millions of dollars in fees from debtors and funnel the money to for-profit ventures offering processing services, critics charge. And vulnerable debtors who have gone to an agency for help sometimes end up in worse financial shape.

That's what Jolanta Troy said happened to her. Troy last month recounted her bad experience with AmeriDebt of Germantown to the U.S. Senate's Permanent Subcommittee on Investigations, which is looking into the industry.

Troy said that after a divorce several years ago she found that her job working with mentally ill children didn't pay enough to support her and her two young children. She resorted to credit cards and panicked as her debt mounted to $30,000.

With no family to turn to, Troy turned to AmeriDebt after seeing its television commercial. That was her mistake, she said. Troy said an AmeriDebt staff member called her four times to pressure her to enroll in a debt management plan, where the agency negotiates with creditors for lower interest rates and waiver of late fees for the debtor.

Troy signed up and sent AmeriDebt $783 for her first month's payment to creditors. She said she didn't realize that AmeriDebt keeps the first payment as an upfront fee for its services. She fell further behind in payments to creditors, racked up late fees and eventually filed for bankruptcy.

"I felt like my fears were manipulated by AmeriDebt for their own benefit," Troy said.

AmeriDebt is being sued by the Federal Trade Commission, Illinois, Missouri, Minnesota and Texas for practices similar to what Troy described. AmeriDebt's chief executive, Matthew Case, who testified at the same hearing as Troy, said the agency stopped advertising for new clients last year and has been trying to resolve problems with regulators.

AmeriDebt also said it had refunded Troy's payment, although she said last week that she hadn't received it.

In light of such complaints, more states are beefing up weak laws that typically exempt agencies from consumer protection laws because they are nonprofits, Loonin said.

The commissioner of the IRS, which is auditing more than 50 agencies, said his agency may yank some credit counselors' nonprofit status and refer cases to the Justice Department for criminal prosecutions.

Still, it may take some time before the industry is cleaned up, and debtors seeking help will need to do their homework to find an agency that operates in their best interest.

Experts advise taking these steps when shopping for a credit counseling agency:

If possible, find an agency in your area that offers face-to-face counseling, which can be more effective than advice over the phone or Internet.

Ask about all fees. "That's always a warning sign if they don't want to answer the question," Loonin said.

Avoid agencies that charge a high, upfront fee or pressure you to pay a "voluntary contribution," experts said. How high is too high? Maryland's law is a good guide, said Eric Friedman, acting chief of Montgomery County's division of consumer affairs. Nonprofits can charge Marylanders no more than $50 to set up a repayment plan, and monthly maintenance fees can be up to $8 per creditor, but not to exceed $40 per month.

Be wary if the agency spends only 20 minutes with you to get your credit information so it can enroll you in a debt management plan. Good agencies will spend time with consumers, trying to understand their financial situation, figuring whether they just need a budgeting lesson or a debt management plan, or should file for bankruptcy. FTC attorney Bethany Matz said such a process usually takes about an hour.

Be aware that enrolling in a debt management plan can negatively affect your credit record. The agency should be able to explain potential consequences.

Ask what training or certification counselors have to assure that "they are not just sales people," Matz said.

Contact the Better Business Bureau and the attorney general's office in the state where the agency is located to find out about any complaints against it, Matz said.

To suggest a topic, contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose@baltsun.com.

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