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.
More Complaints Against Debt Counselors
The Federal Trade Commission has noticed a growing number of consumer complaints -- more than 8,000 -- against companies who bill themselves as credit counselors or debt managers but do little to improve their clients' situation and often even bilk them out of money.
"We have seen the number of complaints rise in the past few years, which is why we've taken a particular interest," said Jeanne-Marie Burke, staff attorney with the FTC.
The Better Business Bureau has noticed a similar trend. Complaints to the bureau about credit service companies grew more than 700 percent between 1999 and 2003, with a significant jump in complaints during the last two years. Some of this stems from consumers' own out-of-control spending habits.
"More people are using credit counselors," said Sheila Adkins of the BBB. "America has a lot of debt, and there's been a lot of unemployment and more people are looking for help."
But that doesn't excuse companies for taking advantage of their debt-ridden clients, Adkins said. Both the FTC and the Better Business Bureau have taken steps to remedy the problems surrounding credit counseling and debt management. Both have targeted offending organizations and begun educating consumers about the dangers of entrusting their finances to fraudulent organizations.
To qualify as a nonprofit credit counselor, an organization is required to teach customers about their finances and how to handle debt in the future. If necessary, a payment plan can be designed to help the client pay down debt, but not before the client undergoes the educational counseling.
Credit counselors are different from "debt management" or "debt settlement" companies, which are only obligated to help customers pay off their debt. This is usually accomplished with some variation of the plan Christina used -- customers send the debt management firm a monthly lump sum, and the firm distributes payments to various creditors.
Both credit counselors and debt managers have faced legal questions in recent years.
AmeriDebt Sued by FTC
In 2003, the FTC filed suit against AmeriDebt Inc., a Maryland-based organization that billed itself as a nonprofit credit counselor and had roughly 60,000 clients. The FTC charged that rather than operating a nonprofit charity, AmeriDebt shunned the educational counseling services and instead enrolled customers directly into a debt management plan.
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.
"They told people they could guarantee at least a 50 percent reduction in debt, and they told customers they'd negotiate in a timely fashion. In a lot of cases, the creditors approached [the company] to settle their clients' debts, but they ignored them," said Carol Paynter, the FTC's lead counsel in the BBFS suit. "They were deceptive in their program -- what people were told would happen didn't really happen."
BBFS officials denied all the charges. A federal court entered a restraining order that temporarily halted BBFS' operations in November, and the company has been put into receivership pending the outcome of the litigation.
Successful Lawsuits Don't Repair Credit
The FTC has pursued similar suits in the last three years, but prosecuting these cases is not always easy. Even in successful suits the victims can be left to rebuild their credit problems on their own.
For consumers, these stories could serve as a warning -- debt counselors or managers can be a helpful way to address high debt problems, but it's important to be informed, experts say. As was the case with Christina, consumers should make sure to follow debt repayment plans closely on their own instead of entrusting all of their finances to a manager.
"I have credit cards again, and I try to purchase within my means, because I realize that if you're not careful, it can bite you," Christina said.
Both the Better Business Bureau and the FTC suggest researching multiple firms before settling on the best one to handle your finances. The FTC has set up credit counseling guidelines on its Web site, and the Better Business Bureau urges consumers to report any suspicious dealings.