Credit "Counseling"

In recent years, we have been deluged with advertisements on television and radio by firms offering to counsel consumers who are over-indebted and seek to reduce their monthly payments, as well as the amounts owed. Some charge only a "voluntary" payment and explain to clients and in their advertising that their generosity arises because they are "nonprofit" agencies. In an excellent article in a recent issue of Business Week, Christopher H. Schmitt, Heather Timmons, and John Cady explain why there is, too often, less to these claims than meets the eye.

Many credit counseling agencies are formed as "nonprofit" entities that do not pay income taxes. However, there are at least two ways in which some of these "nonprofit" companies can be highly profitable for the founders. First, they can pay themselves handsome salaries as agency chief executives. The authors report that federal tax filings show that Bernardo Dancel, head of Genus, was paid $331,065 in 1996. Credit Counselors of America (Phoenix, AZ) paid its president, Michael Hall, $397,466 in the year ended June 30, 2000. Over a period of two years, the same firm paid "at least $461,909 to an accounting firm owned by one of its directors."

But, the real question is whether these agencies deliver on their advertised commitments to consumers. Are the services provided by debt-counseling firms worth the cost? In too many cases, the services appear to be minimal, and the 'cost" is not entirely clear. The advertisements say that there is a "voluntary contribution" of $75 to $100 for a "set up" fee, plus a monthly fee. The authors of the study suggest that consumers who consider the fee as voluntary may find that the counseling firms views their services in the same light.

The editors of Spotlight on Finance have over 25 years of experience with credit counseling agencies that operate under the aegis of the National Foundation for Credit Counseling (NFCC). We can vouch for the fact that many agencies do provide genuine value for consumers, and can be a lifeline to the troubled debtor that needs debt counseling. NFCC member agencies are non-profits that pass through a rigorous external accreditation process, which validates their compliance with financial and customer service standards. But the sad truth illuminated by the Business Week article is that the counseling industry had become a jungle and consumers must beware. Creditors have begun to recognize that the bad actors are doing them no favors in terms of customer relations. Some credit grantors refuse to deal with certain counseling firms or demand a rebate of fees paid to the firms. Given the signs of looming recession, the role of "nonprofit" credit counseling firms is likely to demand more attention.