Report - Credit counseling agencies often give bad advice

Thursday, April 10, 2003

WASHINGTON -- Credit counseling agencies often give indebted consumers bad advice, charge excessive fees and engage in deceptive practices, consumer groups claimed in a report Wednesday.

The criticism follows upon House passage last month of legislation making it harder for consumers to erase their debts in bankruptcy court. The bill also would require consumers to receive credit counseling before filing for bankruptcy protection.

The growing business of credit counseling, advertised heavily, has seen an increase in abusive practices and outright scams, says the report by Consumer Federation of America and the National Consumer Law Center. Many counseling agencies trade on their nonprofit status to gouge consumers, the consumer advocates maintain.

"More consumers are getting bad advice and access to fewer real counseling options," Deanne Loonin, an attorney with the law center, said at a news conference. "Meanwhile, most state and federal regulators appear to be asleep at the switch."

Critics say that counseling agencies vary widely in quality and that many operate honestly and help consumers in financial distress. An estimated 9 million Americans have some contact with an agency every year, and they are often the last resort for consumers before a bankruptcy filing.

The agencies say they act responsibly and provide a valuable service to consumers. Because of shrinking funding in recent years from creditors -- mainly big banks that issue credit cards -- many agencies that belong to the National Foundation for Credit Counseling have had to begin charging consumers nominal fees, the group says.

The report "goes a long way in helping to articulate the issues that need attention in this burgeoning industry," said Lydia Sermons Ward, senior vice president for marketing and communications at the foundation.

She said the group's 143 members "have to abide by specific operating and customer-service standards that ... would preclude them from operating deceptively."

The agencies offer debt-management programs, in which counselors work with consumers and their creditors to come up with a repayment plan for the amounts owed.

Consumers agree to cut up their credit cards, not to take out any new credit and to make a monthly payment to the counseling agency, which distributes it to creditors.

In return, consumers may get reduced interest rates from their creditors and a break on credit card fees.

Consumer complaints about counseling agencies to the Better Business Bureau rose to 1,480 last year from 261 in 1998.

The bankruptcy legislation passed by the House last month was sought by credit card companies and supported by President Bush. It seeks to ensure that credit counseling agencies meet quality standards but does not authorize funds to investigate the agencies and their practices, said Travis Plunkett, legislative director for Consumer Federation. In addition, creditor banks that have cut funding for the agencies in recent years are not required to restore it.


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