Debt-ridden consumers increasingly victimized by credit counseling companies, report finds

Wednesday, March 24th 2004, 12:00 am

By: News On 6

WASHINGTON (AP) _ Consumers drowning in credit-card debt increasingly are being victimized by poor service, hidden charges and high fees charged by some credit counseling agencies that often leave them even deeper in debt, Senate investigators have found.

Consumer complaints are on the rise as new companies come into the counseling business and abuses proliferate, according to a report released Wednesday by the bipartisan investigative panel of the Senate Governmental Affairs Committee. 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,'' the report concludes.

With personal bankruptcies surging to record levels in this country, there is a deep pool of customers for credit counseling companies _ often the last stop before a bankruptcy filing. Credit counselors historically have been financed by banks that issue credit cards, but those contributions have been declining, forcing credit agencies to charge fees.

People described as victims and former employees of some credit counseling agencies were testifying at a hearing Wednesday by the investigative subcommittee, and officials of several agencies were defending their practices.

One of the agencies is industry giant AmeriDebt Inc., which has been sued by the Federal Trade Commission and five states, as well as by 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 the Germantown, Md.-based company made customers believe that an initial fee would be part of their debt-reduction payments to creditors _ but instead, it went to AmeriDebt.

The company has disputed the regulators' allegations. It says that it provides educational services to customers and that the debt-reduction payments are ``voluntary contributions.''

The Senate subcommittee report said the investigation ``has revealed that AmeriDebt is not the only potential 'bad actor' in the industry. Indeed, many of AmeriDebt's practices represent a pattern of abuse among several new entrants in the credit counseling industry.''

The counseling agencies say they act responsibly and provide a valuable service to consumers.

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.

The report found that new entrants in the growing business, rather than relying on the 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 report.

The Internal Revenue Service has said that some nonprofit credit counselors do not meet the standards for educational, tax-exempt status. The IRS recently began auditing 50 credit counseling agencies and has a new program for reviewing the agencies' applications for nonprofit status.

The report recommends that the FTC and the IRS intensify enforcement efforts against counseling agencies that engage in deceptive practices. In addition, it says, Congress should consider legislation to strengthen consumer protections against abuses in the industry.