Credit counseling’s Catch-22

NEW YORK – The reputation of the credit counseling industry has been badly battered in recent months.

First, the National Consumer Law Center and the Consumer Federation of America issued a report accusing some counseling agencies of “improper advice, deceptive practices, excessive fees and abuse of their nonprofit status.”

Then the Internal Revenue Service, Federal Trade Commission and state regulators issued a consumer alert about credit counselors, and the IRS said it would look into pulling the tax-exempt status of agencies that charged too much and provided little or no counseling. On Wednesday, the FTC sued the AmeriDebt agency, alleging it used deceptive marketing to bilk consumers.

As a result of the criticism, some consumers who need help may be hesitant about seeking it for fear they can’t tell the bad from the good.

“People are becoming skeptical and afraid,” said David C. Jones, president of the Association of Independent Consumer Credit Counseling Agencies, based in Richmond, Va. “They hear so many different things they don’t know what to do.”

He added: “In a way it’s a good thing, because people will know to be more careful to look around and be sure they’re dealing with responsible agencies.”

Kayla Fenner, 36, sought help about three years ago from the Consumer Credit Counseling Service in Shreveport, La.

“I had been swimming in debt since I got my first credit card in college at the age of 19,” Fenner said. “I realized that even though I made a good salary, I was living hand to mouth.”

CCCS counselors helped her work out a budget and a payment schedule and Fenner, a registered nurse, has so far paid debt off all but $8,000 of her $37,000 debt.

“They (the counselors) made me cut up all my credit cards, and I had to learn how to live without credit,” said Fenner, married and the mother of two children. “But I did it, and It’s the best thing I’ve ever done. They gave me a new lease on life.”

Patrick Boisclair, chairman of the board of the National Foundation for Credit Counseling, based in Silver Spring, Md., said consumers “should really do due diligence” in selecting a counseling agency.

He said people should be wary if an agency pressures them to sign a debt management agreement without ever talking about their income, spending habits and ability to pay.

“You need to know a person’s living expenses, their personal priorities, their habits – or you can’t begin to talk about what to change,” said Boisclair, who heads the CCCS of Middle Georgia in Macon.

Travis Plunkett, legislative director of the Consumer Federation of America, based in Washington, D.C., noted that the criticism of credit counseling practices comes at a difficult time for the industry.

“The basic product – the debt management plan – has gotten less attractive, not because of the credit counselors but because of the creditors,” he said.

He noted that many creditors refuse to cut the penalty interest rates they apply to families with bad repayment records, and they’ve been providing less funding to the agencies that help consumers, forcing some to cut back on services.

“Consumers are, of course, responsible for their behavior,” Plunkett said. “At the same time, creditors helped to create these debt problems and should take some responsibility for helping to resolve them.”

When Ted Long and his wife Kristie of Hollywood, Fla., felt they needed help with credit card debt, they checked out three credit counseling agencies and settled on the Consolidated Credit Counseling Services of Fort Lauderdale, Fla.

“When we were first married, each of us had five or six credit cards,” said Long. “It was crazy sitting down and writing 10 or 12 checks every month – and never seeing the balance go down.”

Long, 39, a freelance Web designer, said Consolidated Credit counselors sat down with the couple, helped total up their bills and determined what they needed to pay each month to get rid of them. The couple cut up their cards and set up a monthly transfer from their checking account to cover the payments.

He said they’d be finished paying off their debt next summer.

“It hasn’t been painless,” Long said. “If we wanted to make a major purchase, like a mini vacation, we had to start saving six or seven months in advance so we had it paid for.”

And, he said, being in a debt repayment program meant that when they sought financing for the car, they couldn’t get a preferred rate. Long called it “a short-term burden for a long-term gain,” and added that his credit counselors had warned him in advance it could happen.

Still, he said, “I wish we had done it sooner … because now were understand more about how credit works.”