Debt Consolidation Depot
Debt Consolidation & Financial Information Resource Center
March 25, 2004
By Marcy Gordon
The Associated Press
WASHINGTON — Raymond Schuck thought he was being responsible when he went to
Cambridge Credit Counseling for help reducing $90,000 in credit card and
bank debt. Instead, the retired museum director said the monthly payments he
made never reached his creditors — and he ended up filing for bankruptcy.
"My credit rating was completely ruined," the Lima, Ohio, resident testified
yesterday at a Senate hearing looking into the credit counseling industry.
Credit counseling companies, which often advertise heavily, portray
themselves as offering a refuge for consumers drowning in debt. But
lawmakers, regulators and consumer groups charge that some counseling
agencies trade on their nonprofit status to gouge customers, serving more as
an anchor plunging people deeper into debt than as a life preserver.
Each year, an estimated 9 million Americans have some contact with a credit
counseling agency — often the last stop before a bankruptcy filing.
A report prepared by the bipartisan staff of the Senate Governmental Affairs
Committee's investigative panel found that consumer complaints are on the
rise as new companies come into the credit counseling business and abuses
proliferate. The investigators found a pattern of abuse among some
counseling agencies, especially new entrants to the field.
"Clearly, something is wrong with the credit counseling industry," said Sen.
Norm Coleman, R-Minn., chairman of the investigative subcommittee. "Our
investigation has revealed common patterns of improper conduct" by new
entrants.
The industry has changed significantly since its early years in the 1960s
when individuals struggling with debt could go to a nonprofit credit
counseling agency and get free help, Coleman said before yesterday's
hearing.
Only if their problems couldn't be solved through budgeting and education,
he said, would debtors be put in a debt-management plan, where the counselor
negotiates a repayment plan with creditors.
"It was a good system," Coleman said.
But in recent years as consumer debt climbed, a new, more aggressive breed
of nonprofit counselor emerged. More than 810 credit counseling groups
applied for nonprofit status in the past four years.
Audits of 50 credit counseling agencies by the Internal Revenue Service "may
very well" result in some of them being stripped of their nonprofit tax
exemptions or even being referred for criminal investigation to the Justice
Department, IRS Commissioner Mark Everson testified to the subcommittee.
And Thomas Leary, a member of the Federal Trade Commission, said: "We remain
concerned about deceptive practices in the credit counseling industry."
Former employees of Cambridge Credit and AmeriDebt, who also testified, told
of having to use fake names, "boiler room" sales operations and pressure on
commission-paid counselors to get consumers to pay stiff upfront fees, with
no counseling or debt education provided.
Officials of the two companies disputed the accounts of the former customers
and employees. They said their companies act responsibly and provide a
valuable service to consumers.
Chris Viale, chief operating officer of Cambridge Credit, called the
accounts "unfair and distorted accusations."
"There is a popular notion that performance incentives encourage counselors
to act in their own best interests rather than in the interests of
consumers. This is not true," Viale said.
As senators grilled the officials about industry practices, the president of
Debtworks, Andris Pukke, asserted his Fifth Amendment privilege in refusing
to testify.
The for-profit Debtworks, Pukke and his brother are among several parties
named in a lawsuit filed by the state of Missouri against AmeriDebt in
September. Debtworks was formed in 1999 when AmeriDebt spun off its
processing function for consumer debt plans and turned it into a for-profit
business owned and controlled by Pukke, according to the Senate
investigators.
With personal bankruptcies surging to record levels in this country, there
is a deep pool of customers for credit counselors.
Credit counselors historically have been financed by banks that issue credit
cards but those contributions have been declining, forcing counselors to
charge fees.
Credit counseling works by putting consumers who cannot afford to make all
their payments into debt management programs that allow them to consolidate
their debts from several credit cards, reduce their monthly payments and
lower their interest rates. Consumers agree to destroy their credit cards,
not take out new credit and make a monthly payment to the counseling agency,
which distributes it to creditors.
But new entrants — rather than relying on contributions to nonprofit
counseling agencies from credit-card companies or small fees paid by
consumers — use a different structure. They have nonprofit agencies that
generate "massive revenues" paid by consumers for a for-profit affiliate for
advertising, marketing and executives' salaries, according to the Senate
report.
AmeriDebt, based in Germantown, Md., has been sued by the Federal Trade
Commission, five states and consumers.
The FTC alleged that the company used deceptive marketing to bilk hundreds
of thousands of customers and failed to educate people about how to get out
of debt. The regulators also alleged that AmeriDebt made customers believe
that an initial fee would be part of their debt-reduction payments to
creditors — but it instead went to AmeriDebt.
The company has disputed the regulators' allegations. It says it offers
customers educational services, and that the debt-reduction payments are
"voluntary contributions."
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