Credit Aid Agency’s Strategy Draws Fire
Consumer Credit Counseling Service of Los Angeles specializes in helping people get out of debt, but the nonprofit’s attempts to make its own ends meet are raising some eyebrows.
To help fill a $600,000 operating deficit, the L.A. counseling service has proposed setting up a for-profit unit to help consumers file for bankruptcy protection. That would be a huge change for the organization, which was founded to keep people out of Chapter 7 bankruptcy and which historically has discouraged its employees from even saying the word “bankruptcy.”
The service also recently signed agreements with controversial payday loan companies to provide counseling for customers who fail to repay the lenders’ high-interest loans.
The moves to raise revenue reflect the rise in bankruptcy filings as well as the increased competition among debt-counseling firms for clients and the huge growth in payday lending.
But the L.A. service’s actions have stunned consumer advocates, other nonprofit groups that provide financial services and even fellow Consumer Credit Counseling Services nationwide.
Consumers Union attorney Gail Hillebrand called the L.A. credit counseling service’s relationship with payday lenders “outrageous” and raised questions about the ethics of its providing bankruptcy advice.
“All nonprofits are having to look for sources of funding, but we need to be responsible in how we do it,” Hillebrand said. “These payday lenders are the same companies that are putting people on a serious debt treadmill.”
Others worry the service’s actions could alienate traditional lenders, including credit card companies and banks, which pay most of the bills for the nation’s 167 Consumer Credit Counseling Services.
“If the creditors realized even one of our agencies was [providing bankruptcy advice], they wouldn’t be pleased,” said Bill Cullinan, interim chief executive for the National Foundation for Consumer Credit, the counseling services’ umbrella organization.
Filling a Need for Objective Advice
But Peter Lake, new chief executive of the Los Angeles credit counseling agency, said the additional services would fill a need for objective, consumer-oriented advice as payday lending explodes and as bankruptcy filings hit record levels. Lake added that the revenue these ventures would generate is needed to cope with shrinking financial support from lenders and increased competition from well-funded rivals.
“We can do this ... or we can leave it to someone who might be less socially responsible,” said Lake, who was appointed in March. “There’s a limit to how long we can keep losing money before we can’t extend any services at all.”
The Consumer Credit Counseling Service network was founded in 1951 to teach debt-ridden consumers about money management and to help them avoid bankruptcy by setting up plans to repay their creditors.
These repayment plans typically require consumers to pay back 100% of what they owe over three to four years, usually at lower interest rates negotiated with the clients’ lenders.
Most of the network’s funding comes from those lenders, typically credit card companies, auto lenders and banks, which return to each agency a portion of the payments consumers make under their debt repayment plans.
For years, the counseling services had little competition. But beginning in the early 1990s, rivals sprang up to compete for debtors--and the portion of the debtors’ payments that had gone to Consumer Credit Counseling Services.
Today, Consumer Credit Counseling Service affiliates across the country are struggling to cope with less funding from creditors, Cullinan said. In 1996, the Los Angeles service received more than 86% of its revenue from creditors, but this year such payments comprise 66% of the organization’s budget.
To make up some of the shortfall, the L.A. organization now charges $20 for counseling sessions that once were free and has discontinued some of its no-cost workshops.
But the service has resisted other fees commonly charged by rivals, such as a $300 fee to set up a debt-management plan or taking the first month’s payment as a fee instead of passing the money on to creditors.
At the same time, the service’s counselors are seeing an increasing number of people who are too far in debt to qualify for the organization’s debt-repayment plans, Lake said. The service can offer those consumers little help. Consumer Credit counselors are discouraged from even saying the word “bankruptcy,” instead telling consumers who are too far in debt that they should seek legal advice, Cullinan said.
But Lake said he believes his organization could provide a “socially responsible” bankruptcy-filing service to clients it currently has to turn away. Consumer advocates agree that there is a growing need for low-cost bankruptcy. Legal aid services for the poor in Los Angeles say they are being overwhelmed by cash-strapped consumers who need help filing for Chapter 7 liquidation.
Many Can’t Afford Bankruptcy Attorneys
Most individuals file for Chapter 7 bankruptcy, which erases unsecured debts, such as credit card balances. Fewer than 30% of individual bankruptcy filings are for Chapter 13, which requires that at least some debts be repaid.
Bankruptcy-related calls to Public Counsel, a free legal aid service in Los Angeles, have more than doubled in the last year, said staff attorney Magdalena Reyes Bordeaux, head of the service’s debtor assistance program.
Many people can’t afford the $700 to $1,200 charged locally by bankruptcy attorneys for a simple Chapter 7 filing, Bordeaux said. People who use lower-cost services--usually document preparation firms that don’t employ attorneys--run the risk of getting bad or inadequate advice, consumer advocates said.
The credit counseling service’s affiliation with payday lenders also has unnerved some consumer advocates.
Payday lenders offer consumers short-term loans to be paid off by the borrowers’ next paychecks. Annualized interest rates for the loans can spiral to 500% and higher, particularly when consumers “roll” the loans, or extend them from one pay period to the next.
Cullinan said that to his knowledge, no other Consumer Credit Counseling Service in the country has signed an agreement with payday lenders. He noted, however, that those who utilize such lenders “are the people who probably could benefit greatly from a good credit counseling session.”
Lake agreed, noting that “we made it clear [in the agreements with payday lenders] that it should not in any way be inferred that we sponsor or are enthusiastic about their industry.”
