Double Crossed By Debt Counselors

The FTC also charged that despite the fact that the company's Web site said there was no startup fee, AmeriDebt was asking new customers for an initial fee, calling it a "voluntary contribution," and charging a monthly fee averaging $300, sharply higher than what any debt management or counseling firm should be charging, the FTC's Burke said. Customers thought the monthly payments were going toward their debt, when in fact they were going to AmeriDebt, the FTC charged.

"You can't say one thing and do another -- you can't call yourself a nonprofit if you are operating as a for-profit," said Burke. "You can't say that you provide credit counseling if you only provide debt management plans."

Four states filed similar suits against AmeriDebt, asking for millions of dollars in damages. AmeriDebt denied all charges and has said it did offer customers educational services and only took debt reduction payments as "voluntary contributions." The case is expected to be resolved in court, but the company has since filed for bankruptcy, and last month a bankruptcy court approved a plan to sell all of AmeriDebt's current accounts to another nonprofit credit counseling firm, essentially ending its operations.

The judge in the case has not set a trial date, but even if the company and its owners are found guilty, former clients are unlikely to see any money.

"What we're seeking is monetary restitution for consumers who we feel were defrauded, but given the bankruptcy, it remains to be seen how much money is even there," said Darren Bowie, the FTC's assistant director in the division of financial practices.

The Risks of Debt Management

Debt managers, though obligated only to help clients repay their debt, have also faced legal challenges. Late last year, after receiving 127 separate complaints about Massachusetts-based Better Business Financial Services, the FTC charged that the company defrauded debt-burdened consumers by failing to follow through on promises to negotiate their debts with their creditors.

BBFS clients were advised to stop paying creditors as the company negotiated to have their debts lessened and their monthly payments lowered. Clients were directed to set up outside bank accounts to accrue money toward their paying down debt, but often no payments were made to creditors.

In addition to the hundreds and even thousand of dollars paid to BBFS, the FTC said many of the company's clients were sued by creditors while following the company's debt management plan, leading to bigger debt problems as well as legal fees and headaches.