Double Crossed By Debt Counselors

Feb. 15, 2005 — -- The pop-up Internet ads are incessant, and the television commercials flood airwaves on daytime and late-night television, all promising relief to a nation of increasingly reckless spenders. An increasingly broad swath of nonprofit organizations today promise credit counseling, debt management or debt negotiation to consumers in over their financial heads, but do they really help?

For some, credit counseling is a ticket to financial salvation, alleviating debt problems and teaching the skills to avoid overspending in the future. But as American debt loads climb and more and more people turn to outside counselors, many are left feeling fleeced by a process they thought would rescue them.

After graduating high school in the early 1990s, Christina, who did not want her last name used in this story, quickly racked up $8,000 of debt spread over three credit cards. At the time, she was working a minimum-wage job. Realizing she was in over her head, Christina turned to a local credit counselor, who put her into a debt-management plan.

Under the plan, Christina wrote a $175 check every month to her credit counseling company, and the company distributed payments to her three creditors.

"I assumed that once I sent the payment, they'd pay the creditors and I'd get my credit cleared," said Christina, now 34 and living in Moscow, Pa.

In fact, Christina was able to pay off that $8,000 in a little over three years. But a year later, she applied for a department store credit card and was turned down -- even though she had no outstanding debt. She acquired a copy of her credit report to see why her application was refused. She discovered that every payment the credit counselor made during the three-year debt management plan had been late.

"My creditors were paid off, but all of their records reflected that I was a late payer. It took a lot of years to rebuild my credit after that -- I wondered if it might have been better to just declare bankruptcy," she said.