October 20, 2003

BY SUSAN TOMPOR
FREE PRESS COLUMNIST

Make no mistake, all the flashy offers for an easy way out of debt are not on the up-and-up.

And consumers received another important warning on debt-consolidation scams last week from the Federal Trade Commission and the Internal Revenue Service. The IRS said it has begun auditing some of the country's credit counselors.

The bottom line: Watch out for credit counseling crooks.

Regulators are seeing more complaints about questionable practices. And it's again important to warn consumers to look out for high fees even through debt counselors that brag about free services.

I last wrote about the credit counseling crisis in July. It is increasingly difficult to find a reputable debt service agency.

Over the years, many consumers have been told to look for a nonprofit label for debt counselors. But now some nasty players have gotten that nonprofit stamp.

The nonprofit label might make it look like the company is not out to make a bunch of money off your troubles. And debt counselors also have another reason for wanting nonprofit status.

Many times creditors won't work with a for-profit agency. And financial contributions from credit card companies are a major source of funding for any debt counselor, good or bad.
Sterner IRS review

Last week, the IRS said it will take a harder look at credit counseling groups that have the nonprofit status. It said it will conduct a tougher review of new agencies that apply for the tax exemption.

One company that's at the center of much criticism is AmeriDebt, a major debt services company. Illinois and Missouri have sued AmeriDebt. Among other charges, critics claim that AmeriDebt has failed to tell all consumers that their first payment under a debt management plan is kept by AmeriDebt and not sent to creditors.

AmeriDebt has defended its practices. On its Web site, AmeriDebt says it is a "friend of consumers in crisis."

Why are we seeing action now?

One reason is that there's a push in Congress to require debt counseling before a consumer could file for bankruptcy. It certainly makes sense to sweep out the bad actors before making any such rule.

And in recent years, financial contributions from credit card issuers to the debt counselors have been shrinking. So there is more temptation to push up fees elsewhere.

Credit counseling in itself can be useful. Credit counselors often can negotiate lower interest rates on credit cards for troubled consumers. But not all credit card issuers offer breaks.

It's key to realize that credit counseling services can only help lower your bills by so much.

Jane McNamara, president and chief executive officer for GreenPath Inc. in Farmington Hills said the reforms in the industry are long overdue.

Some companies do not offer any counseling or education as part of their programs. And consumers need extra advice to stay out of debt in the future.

"If you don't learn to manage money, this experience does not add value to your life," McNamara said.

McNamara said GreenPath, a not-for-profit debt counseling service that began in 1961, is not being investigated and has not received a notice that it will be audited.

"And we have no reason to believe that we will," she said.

She noted that GreenPath focuses on offering counseling services as part of its program.

Some companies in question also have for-profit businesses that are owned by the top officer of the not-for-profit debt agency.

"I do not own any for-profit companies," McNamara said.
Working with creditors

GreenPath, the former Credit Counseling Centers Inc., negotiates debt payment plans with all types of creditors -- not just credit card issuers. One area of concern is that some groups deal only with credit card debt, and that doesn't help a consumer cope with covering basic living needs, such as a mortgage or utilities.

At GreenPath Debt Solutions, an initial counseling session is free. But GreenPath charges $25 to set up a payment plan and then up to $50 a month for such a payment plan. Consumers who take part in the payment plans also are required to buy a $50 book. Phone: 866-648-8122.

The best bet for any consumer troubled by debt is to look for ways to cut spending. And talk to different services.

Check with the Better Business Bureau about any specific credit counseling organization's record. Run fast from those who promise quick fixes.

It also might be possible to talk with your creditors on your own and see if they are willing to work out a modified plan.

If you think you've been a victim of credit improvement fraud, file a complaint with the FTC by calling 877-382-4357. Or file a consumer complaint via the Web at www.ftc.gov.

Another good Web site: the Consumer Federation of America at www.consumerfed.org. The Web site has posted a major credit counseling study.