Some Credit Advisors Add to Clients’ Debt

Some credit-counseling services--which are supposed to help overextended consumers dig their way out of debt--charge excessive fees that actually can make it harder for consumers to pay their bills, officials at Consumer Reports magazine charged Monday.

“A lot of [credit-counseling companies] are very good, but there are some that are very predatory,” said Marlys Harris, senior editor at Consumer Reports. “They are milking desperate people.”

These revelations came from the magazine’s investigation of the potential effect of the bankruptcy legislation now stalled in Congress. Although the House and Senate bills still must be reconciled, both versions require consumers to consult with a credit-counseling service before filing for legal protection from their debts.

Consumer Reports expected to find that this requirement would overload the largely not-for-profit credit-counseling industry. However, the magazine also found that some nonprofit counseling centers were charging substantial fees for their services--sometimes unbeknown to clients.

“Here are people who are really on the edge, trying to squeeze a few dollars out of their budgets to pay what they owe,” Harris said, “and along comes this credit-counseling agency that is supposed to help them and it actually gets them into more trouble.”

Most notably, a handful of counseling services, including AmeriDebt of Germantown, Md., advertise that their services are free to the consumer. However, the service deducts 100% of the consumer’s first monthly payment--often hundreds of dollars--as a “voluntary contribution” to the counseling service.

One consumer quoted by Consumer Reports said he was charged $200 in late fees when the $450 payment he made through AmeriDebt was “contributed” to the debt-management service rather than paid his creditors.

AmeriDebt contends that all consumer payments to the counseling service are voluntary and disclosed.

“We don’t charge fees. We go by voluntary contributions,” said Jeffrey Formulak, director of operations at AmeriDebt in Germantown.

The company’s debt-management form, which is signed by consumers who set up payment plans, spells out the standard formula by which AmeriDebt is paid. There is no place for consumers to set their own donation amount, Formulak acknowledged. However, consumers are not bound to accept that part of the agreement. They can choose to cross it out and pay less than what’s stipulated, or not donate to AmeriDebt at all, he said.

Formulak said the company’s debt-management agreement is under review and may be revised.

Over the last decade, as revolving debt on consumer loans and credit cards has soared tenfold to $680 billion, debt counseling has become a growth industry, Consumer Reports’ Harris said.

Traditionally, debt counselors were paid by banks and other lenders. But as more people resorted to debt management--roughly 3 million consumers now participate in these sponsored debt-repayment plans--the credit industry began to reduce their payments to counseling services as a way of cutting costs.

Now, many legitimate nonprofit organizations charge fees. The National Foundation for Consumer Credit, the industry association representing Consumer Credit Counseling Services, says that roughly one-quarter of its members charge consumers. CCCS accounts for more than half of all credit counseling in America.

However, most credit counselors charge modest amounts--$10 to $25--to help consumers work out a budget or payment plan. Some charge a few dollars a month to send payments to a client’s creditors.

The National Fraud Information Center has received some complaints about companies calling themselves debt-counseling services. There hasn’t been an avalanche of complaints about credit counselors, said Susan Grant, the center’s director. But any complaints worry consumer groups because most of the groups advise indebted consumers to seek credit counseling, she said.

“Since we think that credit-counseling services are very helpful for consumers, we are very concerned that those services remain legitimate and not take advantage of already vulnerable consumers,” Grant said.

There is no federal monitoring of the credit-counseling industry, so consumers must approach the industry with caution, Harris added. Know what services are provided. Read the forms and make sure you understand them before you sign. If you’re uncertain about fees, ask about them and steer clear of any organization that hesitates to explain anything you don’t understand, she said.