A Debt Trap for the Unwary

Credit counselors pose as nonprofit saviors, but some only get consumers deeper into the hole

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.

The number of consumers who end up in the arms of agencies could soar. Last year, about 9 million Americans had some contact with the 750 or so in the U.S. But 1 million new clients could be flocking to them annually, thanks to pending federal legislation that would require individuals to speak with credit counselors before they could file for bankruptcy. Also, states such as New York make counseling mandatory for borrowers who fall prey to predatory lenders.

Now, the agencies are facing a financial crunch. Their main source of income has been the fees they collect from such creditors as banks and credit-card companies on whatever their clients repay--an estimated $7 billion last year. But creditors, dismayed at counseling agency practices and under profit pressure themselves, have been whittling away at the fees they pay. Once as much as 15%, they're now 8% or less.

VULNERABLE TARGETS. Regulators have been slow to realize how open to abuse the credit-counseling system has become. "We had no idea that there was a potential for such a rip-off in this area," says Bennett Rushkoff, an attorney with the Office of the Corporation Counsel, the District of Columbia's legal agency. Officials such as Friedman have taken up complaints made to them. And last year, the state of Maine enacted a law requiring registration and bonding of agencies. "Consumers sent their money off faithfully, and their creditors weren't paid," explains William N. Lund, director of the state's Office of Consumer Credit Regulation.

Of course, not all agencies are troubled, and many have helped consumers turn their lives around. The best, observers say, take a more active interest in clients and give them lots of hand-holding: They work out detailed individual plans at face-to-face meetings and offer free information or seminars on such finance skills as budgeting and debt management. Their fees, too, tend to be more reasonable. Among agencies that draw favorable reviews are Consumer Credit Counseling Service of Greater Washington (D.C.) and Consumer Credit Counseling Service of the Mississippi River Valley. But, as industry insiders acknowledge, even the best rarely get better deals than consumers could negotiate for themselves.

The aggressive new entrants work differently. They target a national audience, spend big on advertising--million-dollar campaigns are not unusual--and rely heavily on brief phone and Internet interactions. Many buy names of debt-strapped customers from mortgage and other financial companies or use high-pressure sales tactics to sign them up. "They get people at a vulnerable time," says Kristy Welsh, who runs Credit Info Center, a financial-advice Web site.

Some clients' vulnerability only increases. In Willsboro, N.Y., electrician John W. Pedro saw his debt load grow after signing on two years ago with the biggest agency, Genus Credit Management in Orlando. He was $9,000 in the hole after making home repairs, paying for them with costly finance-company loans and borrowing on high-interest credit cards. Genus promised to make him debt-free in 40 months. But, says Pedro, fees and late charges started piling up, apparently because his monthly payment was set too low. By the time Pedro pulled out, his debt had grown by $1,000, he says. "A lot of these companies are out there preying on people's financial misfortunes, and they call themselves `nonprofit,"' says Pedro. Genus spokesman Tim Raftis declined to discuss specific cases but says the agency's overall record is "very exemplary." Genus has now sold its accounts to another agency.

LAVISH SALARIES. Another of the nation's largest agencies, AmeriDebt Inc. of Germantown, Md., is also a target of frequent complaints. Last year, facing $20,000 in credit-card debt, Robb Topolski turned to AmeriDebt, attracted by its nonprofit status. The Portland (Ore.)-area chip-plant supervisor says he was stunned when AmeriDebt pocketed his entire first payment as a "voluntary contribution." And he was shocked to learn it was collecting nearly 10% of his payments as continuing contributions. He concedes he should have read his contract more closely but says his AmeriDebt representative never disclosed the fees as he applied pressure for Topolski to sign quickly. AmeriDebt's levies put Topolski behind with one creditor, triggering late fees. Disgusted, he quit in April. "Understand--they're not doing credit counseling," he says. "They're just passing through your money and skimming some off the top for themselves." The agency's attorney, Julian H. Spirer, says the complaints are typical for any business but "quite few in number" given AmeriDebt's size and visibility.

Although agencies are tax-exempt because they're supposedly operating in the public interest, many seem just as keen to serve private interests. Lavish salaries are common. The head of Genus until 1998, Bernaldo Dancel, a brash Air Force veteran who says he got into the business after suffering his own bankruptcy, drew big salaries, reaching $331,065 in 1996, according to Genus' federal tax filings. Likewise, Credit Counselors of America, based in Phoenix, paid its president, Michael Hall, $397,466 in the year ended June 30, 2000, according to its federal tax filing. By comparison, the average top salary nationwide for comparable nonprofits is $134,000, according to Abbott, Langer & Associates Inc., a Crete (Ill.) compensation consultancy. Hall says his salary was reasonable; Dancel that there was nothing untoward about his.

The brass at agencies often indulge in what seems to be self-dealing in the purchase of real estate, supplies, and services. Such arrangements, says Rushkoff, are "just a new way to get the money out of the nonprofit and into the for-profit." For instance, Credit Counselors of America bought its building from its president, and has paid at least $461,909 in accounting fees to the company of one of its directors over two years. Hall says the fees and the real estate transaction were appropriate. "I don't think there's been anything to be concerned about," he says. "[We] have good controls."

STEERING. While Dancel was at Genus, the company supported, and later bought out, a for-profit company that Dancel established, Freedom Network International of Howard County, Md., which claimed to offer discounts on consumer purchases. Dancel used money borrowed from Genus, along with transferred assets and personnel, to launch a for-profit venture, Amerix Corp. of Columbia, Md., according to interviews and tax filings. Amerix, which provides computer services to manage transactions between consumers, counseling agencies, and many thousands of creditors, quickly went on to do at least $123 million in business with Genus over three years, according to agency documents. Dancel says he doesn't recall the deals, although documents filed with the state place him in the middle of the action. He says Amerix got no support from Genus and that all his dealings were proper.

In another case, DebtWorks Inc., a Germantown (Md.) for-profit company founded by Andris Pukke, received at least $2.2 million in business from AmeriDebt, starting when his wife Pamela was president. AmeriDebt also steers customers to a for-profit mortgage company with links to Pukke, according to corporate filings. Pukke and an AmeriDebt attorney insist there is nothing improper about AmeriDebt's business with Debtworks, and that Pukke's wife, who has left AmeriDebt, was not involved in the decision to give business to her husband's company.

In 1999, the Office of the Corporation Counsel accused Pukke of using AmeriDebt to create business for a related for-profit finance company by charging fees for promised loans that never materialized. The finance company, Infinity Resources Group Inc., last year agreed to pay about $2 million in refunds to 10,000 customers across the country, according to a consent order. Pukke says both cases were unfair, and he was a victim when lenders failed to live up to agreements with him.

Customers who divulge some of their most private information to counseling agencies may be surprised who gets access to it. It's not unusual for top agency executives to have violated securities and other laws. Gary A. Vosick, president of Trinity Credit Counseling in Cincinnati, had his securities license suspended by the the Ohio Commerce Dept.'s Securities Div. two years ago, after acknowledging in a consent order that he made unauthorized sales of securities involving one company that went bankrupt and another in trouble with regulators in several states. Vosick says the incident was a one-time misunderstanding and that he "wasn't trying to rip anybody off."

Before becoming a director of Cambridge Credit Counseling Corp. in Agawam, Mass., Richard J. Puccio ran afoul of securities laws. In 1996, the Securities & Exchange Commission barred him from the securities industry for at least five years for participating in a boiler-room scam at Stratton Oakmont Inc. "Puccio's misconduct could hardly be more serious," the SEC said in a ruling. Cambridge Credit attorney Paul Kaplan acknowledged the offense but says Puccio doesn't deal with consumers or handle their funds.

NO DEAL. With problems in the industry mounting, banks and other creditors are taking a tougher line: refusing to deal with some agencies, cutting fees generally, and seeking rebates on payments to others. "There are clearly unscrupulous agencies out there that we won't do business with anymore," says Tony L'abbate, senior vice-president for payment processing at J.P. Morgan Chase & Co.

That doesn't help consumers much. Many of the agencies with which the banks will still deal are demanding more "voluntary contributions" from consumers. The fees vary, but they usually consist of a set-up fee of $75 to $100, or the equivalent of a monthly payment plus a smaller monthly fee. Voluntary they rarely are. "It was obviously mandatory. If you didn't pay it, they were going to find some way to get it from you," says Casandria Cocking, a stay-at-home mom in Garland, Tex., who balked at AmeriDebt's fees.

Born of people's misfortunes, credit counseling was a sleepy cottage industry for a long time. Now, larger and troubled, it may be more in need than its clients of being set back on the straight and narrow.

By Christopher H. Schmitt in Washington, with Heather Timmons and John Cady in New York

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