Credit agency's accounts are sold

Texas nonprofit gets OK of court to take over up to 60,000 AmeriDebt clients

`Significant victory for consumers'

January 25, 2005|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

GREENBELT - A U.S. Bankruptcy Court judge approved yesterday the transfer of thousands of clients from AmeriDebt to a Houston-based nonprofit, leaving little left of what was one of the largest credit counselors in the country.

Judge Paul Mannes approved the sale of Montgomery County-based AmeriDebt's remaining 50,000 to 60,000 accounts to Money Management International. Fewer than 1,000 of those are Marylanders.

"MMI is experienced," said Chapter 11 Trustee Mark D. Taylor yesterday while recommending the sale. "They are qualified. They are capable of protecting the interests of customers."

The transfer of the accounts will take weeks and is expected to be completed in mid-April. AmeriDebt customers won't see any change in their repayment plans to creditors, MMI officials said. Also, MMI's fees for its services are voluntary, and the nonprofit complies with state laws, where fees can vary, the group said.

"It is a significant victory for consumers," said Jeanne M. Crouse, a bankruptcy counsel for the Federal Trade Commission who attended yesterday's hearing. The FTC filed a lawsuit against AmeriDebt more than a year ago, accusing it of deceptive practices.

"We believe the consumers who were preyed upon by AmeriDebt were very unsophisticated, vulnerable and needy," Crouse said. "They were promised education and counseling when they signed up and they never got that."

For AmeriDebt clients, the move resolves questions that have lingered since early June. That's when the nonprofit sought bankruptcy court protection under Chapter 11 so it could keep creditors at bay while reorganizing its finances. At the time, AmeriDebt reported it had $8.38 million in assets and $12.36 million in liabilities.

Today, AmeriDebt operates in Gaithersburg and has four employees. Taylor, who has been overseeing AmeriDebt's operations since September, said the nonprofit's legal troubles were too deep for it to successfully emerge from court protection. He then considered offers from about 13 counseling agencies to acquire AmeriDebt's accounts.

Some groups were eliminated because they lacked the necessary licensing, they were too small and only wanted pieces of AmeriDebt, or they had a relationship with the troubled nonprofit.

Four candidates remained, but "head and shoulders above that group was MMI," Taylor told the court yesterday.

Under the agreement, Money Management will pay AmeriDebt $12 each month per account for three years, or until AmeriDebt's client base falls to 4,000.

When the trustee settled on Money Management in December, it was the high bidder, Taylor said. Since then, two other groups have submitted higher bids. But Taylor maintained that MMI would provide better service.

MMI has about 85,000 clients and has experience merging counseling agencies, Ivan Hand, the group's president and chief executive told the court yesterday.

The nonprofit was created in 1996 through the merger of six agencies. Since then, it has added 13 more agencies to its operations. It has 95 offices in 15 states.

MMI employs more than 700 workers, including about 500 credit counselors. AmeriDebt's clients will be handled by 100 employees. MMI counselors will be contacting AmeriDebt customers to assess their financial situation and counsel them, Hand said.

For AmeriDebt, the next major step will be liquidation. Taylor is negotiating with creditors to devise a plan to liquidate AmeriDebt during the months ahead.

At one time, AmeriDebt was one of the largest of a new breed of credit counselors that emerged in the 1990s as consumer debt soared.

Based in Germantown at the time, AmeriDebt grew through heavy advertising of its debt management plans on late-night television. The plans basically provide debtors a break on interest rates and late penalty fees from their creditors in exchange for making regular repayments.

Complaints about the agency and the industry grew, too, and AmeriDebt was dubbed by one consumer advocate as "the poster child for bad credit counseling." AmeriDebt countered, saying its fees were voluntary and disclosed, and that the nonprofit had helped many consumers for free.

In 2003, Illinois, Missouri, Texas, Minnesota and the FTC sued AmeriDebt over its practices. Essentially, the lawsuits claimed that AmeriDebt's fees were excessive and poorly disclosed. Regulators also charged that AmeriDebt acted more like a for-profit business, operating to make money for affiliates and other individuals.

The Internal Revenue Services has filed a claim against AmeriDebt in bankruptcy court for about $15 million, in anticipation that AmeriDebt's nonprofit status might be revoked and back taxes would be owed.

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