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| The Basics | Feds sue, say debt counselor duped debtors
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AmeriDebt billed itself as a trusted nonprofit and 'friend of consumers in crisis,' but the FTC says one of the nation's largest debt counselors is neither.
By Liz Pulliam Weston
It may be too little and too late, but the federal government is finally moving against the rats nest that is credit counseling.
The Federal Trade Commission Wednesday sued AmeriDebt, one of the nations largest credit counselors and the target of several state lawsuits. The feds say AmeriDebt lied to its customers, misrepresenting the fees it charged, the services it offered and the very nature of its business.
Consumer Reports blew the whistle on AmeriDebt and others of its ilk more than two years ago, describing in its July 2001 issue the companys suspect tactics. The consumer magazine also detailed AmeriDebts link to for-profit agencies that were paid millions in fees.
Abusive credit counseling is something we have been raising as a serious concern for several years, said Shelley Curran, spokeswoman for Consumers Union, which publishes Consumer Reports. Were glad the FTC finally stepped up to the plate.
90,000 current clients
Thanks in part to companies like AmeriDebt, credit counseling has become a huge business. Consider:
- More than 3 million people contacted a credit counseling company last year for help in managing debts
- Credit counselors collected about $7 billion in payments as part of debt-management plans, which typically allow consumers to pay back their credit cards and other unsecured loans in three to four years at reduced interest rates
- AmeriDebt alone claims to have served more than 400,000 consumers, including 90,000 currently enrolled in debt-management plans. To drum up that business, the FTC says, the company spent more than $11 million a year on advertising.
But AmeriDebt and its brethren are the scourge of the legitimate credit counseling industry, which was founded more than 50 years ago to help consumers repay their debts and avoid bankruptcy. Older agencies, which are typically affiliated with the National Foundation for Consumer Credit, have been increasingly outgunned by upstart rivals posing as nonprofits and willing to spend heavily on television and Internet advertising.
The big losers, Curran said, are consumers who think theyre getting their financial troubles under control by signing up with outfits that lie, cheat and trash their customers credit ratings.
(Consumers) should be able to get help without making the problems they have even worse, Curran said, which is precisely what companies like AmeriDebt have done.
The accusations
According to the FTC lawsuit, AmeriDebt:
- Promises to teach people how to handle credit, but offers no instruction. Instead, it enrolls people in debt-management plans and collects payments and fees from them.
- Claims to have no upfront fees, but typically takes the consumers first monthly payment as a fee rather than forwarding it to creditors. Creditors often report these missed payments to credit bureaus, further injuring customers with troubled credit and devastating those with good credit. (Late payments have a bigger effect on your three-digit credit score when youve previously been on time with your payments.)
- Claims to function as a nonprofit, but instead operates for the economic benefit of for-profit companies and/or private persons -- especially, Andris Pukke, a founder of AmeriDebt who owns DebtWorks, the company that actually runs the debt-management program. AmeriDebt paid DebtWorks $13 million in 2000 and $27 million in 2001, the lawsuit claims.
Four years ago, AmeriDebt settled similar charges with Washington, D.C., corporate regulators. That time, AmeriDebt was working with a Pukke-owned entity called Infinity. AmeriDebt has since been sued by the attorneys general of Illinois, Minnesota, Missouri and Texas for deceptive practices.
It was those lawsuits, rather than the latest FTC action, that seem to have finally crimped AmeriDebts style. AmeriDebt issued a press release dated Oct. 23 saying it would close its doors Nov. 1 to new customers, cease advertising and lay off most of its staff. The release quotes AmeriDebts attorney saying that AmeriDebts ability to serve new consumer clients has been compromised by the negative publicity surrounding our organization.
Lawmakers in some states have tried to address the abuses with legislation. Laws in California and Maryland limits fees credit counselors can charge, among other restrictions.
Good works get a bad name
But many believe outfits like AmeriDebt have poisoned the well for the whole industry, given credit counseling a bad name and starving legitimate operators of income they need to survive.
For most of its history, credit counseling was funded relatively generously by the credit card industry, which returned to the counseling agencies 15% of the debt they collected from consumers. The agencies did little advertising and focused on consumers who were seriously behind on their payments.
As debts and bankruptcies soared in the 1990s, what Consumer Reports calls the new breed of credit counselors saw the money that could be made and began using television and Internet ads to lure new customers. Some appealed openly to people that werent behind in their payments but who simply wanted to negotiate lower interest rates with their creditors.
That incensed lenders. As the number of people in debt-management plans climbed, the credit issuers cut back on the share of payments they returned to credit counselors to 8% or less. It became harder to win lower interest rates for consumers, which had been a key advantage of credit counseling services. The older agencies, which had once provided a multitude of free services including budgeting classes, often had to cut back.
What if you need help?
Some of the old guard have adopted brave new tactics to survive. Consumer Credit Counseling Service of Los Angeles, an NFCC affiliate, has opened an arm that advises people how to file for bankruptcy. Given that for years CCCS counselors were forbidden from even saying the word bankruptcy, the venture has generated no small amount of controversy.
Shutting down more bad actors might help the legitimate players to survive, but the FTC wont comment about whether any other lawsuits might be in the works, other than to say the government agency will continue to be active and vigilant in protecting consumers against deceptive practices, in the words of spokeswoman Jan Schwartzman.
In the meantime, if youre considering credit counseling, first take the following steps:
- Read my previous column, "The consumers' guide to credit counseling" to understand who can benefit from debt management plans and their potential effect on your credit rating.
- Dont sign up with a credit counselor unless youre already behind on your debts. If your credit is still good, you may be able to negotiate lower interest rates with creditors on your own simply by threatening to move your balances to a lower-rate card.
- Look for an agency affiliated with the NFCC or the Association of Independent Consumer Credit Counseling Agencies. These folks arent perfect, but they tend to be more upfront about their costs and more straightforward in their dealings with consumers.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
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