Debtors, beware of credit-counseling firms
BY LISA MUNOZ
The Orange County Register
(KRT) - If you stay up late, you've probably seen the infomercials."Cut your debt in half."
"Stop harassing phone calls from creditors."
"Improve your credit."
If you are having trouble paying your bills, those TV appeals - or similar ones in print and on the Internet - can be enticing. But companies that promise rapid relief for debt woes may not be the best answer for people with credit problems, consumer groups warn.
The Federal Trade Commission, the Internal Revenue Service, consumer groups and state regulators across the country caution that a new crop of credit-counseling agencies has sprung up that make big promises, but charge exorbitant fees, offer little to no consumer education and push plans that generate revenue for them, regardless of what's right for their clients. Debt-burdened consumers now face difficult choices when they look for an organization that can help them.
"Many (credit-counseling organizations) can be valid, but some of these new companies put consumers into debt management plans without considering their actual situations," said Jessica Rich, a deputy director in the FTC's Bureau of Consumer Protection who is heading a review of such practices.
A decade ago, there were about 200 credit-counseling organizations in the country. The vast majority were local or regional agencies that offered face-to-face counseling and debt assistance, such as Consumer Credit Counseling Service.
By 2002, more than 1,000 credit- and debt-management organizations were in operation, according to a study by consumer advocacy groups.
The number of credit-counseling agencies has expanded in response to demand from borrowers. As Americans have become increasingly reliant on credit, by last fall consumers had accumulated a record $740 billion in revolving debt on credit cards, store cards and others. One study estimated that nearly 9 million financially troubled borrowers contact a consumer credit-counseling agency each year.
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Traditional nonprofit credit-counseling agencies have been around since the 1960s, providing a range of services, from payment plans that allow debtors to get a handle on their bills to lessons in budgeting and saving. They were supported by credit-card companies, seeking to encourage consumers to pay off their debts and avoid bankruptcy. Credit-card issuers paid commissions, known as Fair Share contributions, as high as 10 percent of the amount consumers paid back.
But credit-card companies have reduced that financial support during the past three years. Many reduced their Fair Share contributions to 2 percent to 4 percent, and some dropped them entirely.
That created a budget crunch.
"We're caught between a rock and a hard spot," said Diane Wilkman, spokeswoman for Springboard, a Southern California credit-counseling service based in Riverside. "We've had to scale back our operations and several agencies have closed."
Her agency shut its Orange County location temporarily while it searches for cheaper office space.
Santa Ana-based Consumer Credit Counseling Service has kept open its six offices in Orange County.
Nationwide, reductions in credit-card companies' support for credit counseling has resulted in higher fees, aggressive marketing tactics, and fewer educational services for consumers, concluded a recent study by the National Consumer Law Center and the Consumer Federation of America.
Among the groups it criticized were Cambridge Consumer Credit Counseling and American Consumer Credit Counseling, both of Massachusetts, and Phoenix-based Credit Counselors of America, now known as Take Charge America.
Targets of the report disputed its findings. "Our fees are some of the lowest in the country," said Max Simmons, chief financial officer of Take Charge America. "We are not predatory in any way."
Others said they offer something traditional agencies cannot.
"Conveniently missing from that report is information about our rebate program. As long as the client makes six consecutive payments, we split the Fair Share 50-50 with them," said Montieth Illingworth, a corporate spokesman for Cambridge Consumer Credit Counseling. "The model they have in mind is based on a social-service mindset, where they treat the client as a welfare case. That report tried to demonize the new generation of credit-counseling agencies. ... It ignored the new standards and practices that have professionalized this industry and greatly increased the success rate."
The report on credit counseling was toughest on new agencies that it accused of charging high fees, but it didn't spare traditional ones. It criticized them for inefficient methods of communication and payment and for often having run-down office space in undesirable areas.
Traditional credit-counseling organizations have limited financial resources. Under state law, they can charge no more than $50 for education and counseling, plus 6.5 percent of any money repaid to creditors under a debt-management plan, up to a maximum of $20 a month.
But other types of debt-relief organizations can set higher fees. For example, four for-profit companies that serve Southern California debtors charge initial fees of $295 to $775, and two of them collect 20 percent to 25 percent of any reduction in debt that they negotiate.
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In October, the IRS announced it was auditing dozens of credit-counseling agencies to ensure they were not abusing their nonprofit status, using it to skirt regulation.
The audit includes a review of agencies' marketing materials to ensure that they provide counseling or financial education, a requirement for maintaining nonprofit status. The IRS did not identify any of the businesses under investigation.
In November, the FTC sued AmeriDebt, one of the largest new credit-counseling organizations. The suit alleges that, although the Maryland-based organization promotes itself as a credit-counseling agency that teaches consumers how to handle their finances, that misrepresents the true nature of its services. The FTC also said AmeriDebt misrepresents the costs of its services and is set up to make money for affiliated companies and individuals.
AmeriDebt did not return calls seeking comment, but in a statement it pledged to clear its name.
"The attack on AmeriDebt is symptomatic of a much deeper crisis in credit counseling today," AmeriDebt attorney Zynda Sellars said in the statement. "Consumers need help from independent organizations that are not an extension of the very credit-card companies that have encouraged customers to bury themselves under mountains of debt."
Mark Guimond, president of the American Association of Debt Management Associations, which represents many of the newer credit-counseling agencies, though not AmeriDebt, insists that those agencies have a valuable role to play.
Two kinds of consumers seek help from credit-counseling agencies, he said, and so it makes sense to have two kinds of agencies to serve them.
On one end, he said, are consumers with chronic credit problems, such as unpaid bills over a long period. They need counseling, so traditional credit-counseling agencies work for them, Guimond said.
On the other end are consumers who have racked up debt because of an acute problem, such as a divorce, illness or job loss. They need the immediate relief that a debt-management plan - set up and maintained over the phone or Internet - can provide. The newer generation of agencies, which include agencies such as AmeriDebt and Cambridge Consumer Credit Counselors, are aimed at those consumers, he said.
Like many growing industries, credit counseling has expanded into a new niche: debt settlement.
Debt-settlement companies, also known as debt-negotiation services, focus exclusively on negotiating with creditors to reduce the total their clients owe.
Unlike credit counselors, they advise clients to stop paying their bills until creditors are willing to discuss settling their account for less than the original amount owed.
Debt-settlement firms say they are innovators, on the frontier of helping consumers.
"The credit-card industry ... is built on tactics of usurious interest rates and preying on the public. They know that people will abuse credit cards," said Paul Basurto, chief executive of U.S. Debt and Credit Solutions, a debt-settlement firm in Lake Forest. "Our job is to represent the little guy. We're trying to give the average consumer a voice to fight these excessive credit-card interest rates and unconscionable tactics."
Firms such as his can talk creditors into settling consumers' accounts for only 35 percent to 50 percent of what was originally owed, Basurto said. But such firms' strategies have been lambasted by consumer groups and credit counselors.
"Telling consumers not to pay their credit-card bills - to put their accounts in settlement action - with the promise that they can get out of debt for pennies on the dollar, is not responsible financial management," Guimond said.
Travis Plunkett, legislative director for the Consumer Federation of America, said debt-settlement companies charge too much for too little.
"The up-front payments can be hundreds of dollars. We're talking about $700, $800, $900 - just to set up. That's before they've even done anything," he said. "We're talking about companies that mislead people into believing that it won't be a long-term hit on their credit rating, which is false."
The myriad of debt-relief alternatives can be confusing to consumers who simply want to put an end to their credit troubles.
"In theory, consumers could do this on their own, but usually if they're in this position, there are too many people to communicate with," said Plunkett. "Most people forget how much they owe. They get very emotionally upset about it. They're stressed because creditors keep calling them. At a certain point, their instinct is just to hide."
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