Credit Counseling

Although credit counseling has not yet attracted much legislative attention, a recently published study suggests that this may change as a new breed of "non-profit" credit-counseling agencies has emerged that may be counter-productive for consumers. The National Consumer Law Center (NCL) and the Consumers Federation of America (CFA) have released an extensive study, Credit Counseling in Crisis. Their joint press release "details the severe threats to consumers from a new generation of credit counseling agencies."

Whereas in previous years credit counseling agencies were funded by credit grantors and were truly not-for-profit organizations, some of the new "non-profit" credit counseling firms are paying their executives (founders) high salaries and providing generous entertainment budgets. The Internal Revenue Service and various state agencies are responsible for regulating these agencies. However, the report suggests that some of these regulators have failed to meet their oversight obligations. "For example, American Consumer Credit Counseling reported paying its president in 2000 a salary of $462,350 per year plus over $130,000 in benefits. In that some year, Cambridge Credit Counseling reported a net financial gain of about $7.3 million."

The report levels a number of other charges against the for-profit counseling firms.

• Excessive costs to consumers. "...most agencies now charge fees to set up a Debt Management Plan (DMP) and to maintain it on a monthly basis."

• Agencies do not forward consumers' payments to creditors on time.

• Agencies deceptively claim that fees are voluntary and do not disclose fees to potential clients.

• Agencies funnel consumers to DMPs regardless of chance of success. In some cases the consumer is too far gone for the DMP to help them for long; in other cases, the consumers don't need the restructuring (and creditor concessions) that is part of a DMP because with a little advice they can handle their debts on their own.

• The new players may be damaging the reputation of the entire counseling industry. More creditors have become unwilling to reduce their interest rate to consumers who adopt DMPs. "More than half of those who dropped off a DMP were going to declare bankruptcy."