A Debt Trap for the Unwary

They advertise relentlessly on TV and the Internet. "Save thousands...put $$$ back in your pocket!...save up to 40% off of your monthly bills!...now it's your turn to become debt free!...credit counseling can help you rest peacefully at night," says a come-on for New Step Solutions Inc. of Naples, Fla. As the economy falters, Americans, choking on a record $1.6 trillion of consumer debt, are flocking to credit-counseling agencies that promise to cut deals with creditors and wrap everything into a single, affordable monthly payment for clients.

Sounds great. But it could turn into a nightmare. The billion-dollar credit-counseling industry is deeply troubled. Some clients end up in worse financial shape after using agencies. The fees they pay, usually labeled "voluntary contributions," are often steep. Some agencies are fraudulent; others are run by executives with questionable backgrounds. The agencies, which mostly operate as nonprofits, often pay their executives lavish salaries and make cushy deals for goods or services with related companies. They also steer consumers to affiliated for-profit companies that make debt-consolidation or home-equity loans. "This whole industry is fertile ground for scams," says Eric S. Friedman, a Montgomery County (Md.) consumer-protection official who with colleague Myriam A. Torrico has been tracking credit-counseling fraud.