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By Lisa Munoz
ORANGE COUNTY REGISTER
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."
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 aboute to the current terms and conditions will be tossed
in as well.
There is no getting around your responsibility
to read those little annoying fine-print brochures slipped in.
There is no way to overstate how important it is to understand
how your agreement is being changed.
The option
The good news is that you do have an option if
you don't like the new terms.
You can contact your credit-card company and ask
what actions you need to take to not be subject to those terms.
They will probably not allow you to use the card and, if you do,
the new terms apply to the entire balance on the card. You could
also move your balance to another card and then not be subject
to the new terms that have an impact on your balance.
Here are a couple of points to keep track of in
the term changes:
• Due Date: Your payment must be received
before the time specified in your agreement. If not, you could
be subject to a late fee of as much as $35.
Make sure you know when your payment is due, according
to the fine print.
Send your payment as early as possible to avoid
mail delays.
• Interest Rate Changes: There is no such
thing as a truly fixed interest rate. These rates can be changed
with as little as 15 days' notice, and your rate can be jacked
way up if your creditor does not like what they see on your credit
report. Make sure you understand how much flexibility your creditor
has to change your rate.
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