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Counselor, collector

Credit counseling agencies offer debt-ridden consumers guidance and alternatives to bankruptcy. But here's a little-known fact: The credit card industry foots much of the bill and gives agencies a commission on debts they recover from clients.

By SCOTT BARANCIK, Times Staff Writer
© St. Petersburg Times
published April 14, 2002

ST. PETERSBURG -- Drowning in debt? Loyd Cunningham has been there, and he would be happy to save you.

It won't be painless. He might suggest you cancel the cable TV, get a second job, sell the family piano or find a roommate. But free up enough cash, and he may be able to cut a deal with your lenders. About 250 St. Petersburg residents are on a multiyear "debt management plan" with him.

Cunningham and his colleagues at the Consumer Credit Counseling Service of Central Florida and the Florida Suncoast work hard for little pay helping consumers swamped in debt. Such nonprofit counseling services are so trusted that radio talk show hosts and newspaper columnists regularly recommend them.

But critics say consumers should keep in mind who foots much of the bill for all of this counseling: the credit card industry. The industry created the nonprofit credit counseling movement 50 years ago and sustains it today by giving agencies such as Cunningham's a commission on whatever debts they recover from clients.

"They are just a glorified collection agency," said Ric Feinberg, whose Tampa law firm, Debt Relief Legal Centers, specializes in consumer bankruptcy filings.

Bankruptcy, which can wipe out debts, is one option Cunningham and his colleagues rarely recommend. It has been at least eight months since he suggested it to a client. Cunningham acknowledged that bankruptcy is anathema to the credit card companies that underwrite his work.

"It's a legitimate criticism," Cunningham said. "Obviously, we're not going to refer someone to a bankruptcy except in dire circumstances."

In 2000, Cunningham's agency recovered $33.3-million from more than 8,000 clients. It's money that might otherwise have evaporated with the smack of a judge's gavel.

Consumer Credit Counseling, which was started in 1975, serves Pinellas and Pasco counties and several other counties in Central Florida. The Consumer Credit Counseling Service of the Florida Gulf Coast serves a number of other counties, including Hillsborough and Hernando.

They take their cues from the National Foundation for Credit Counseling, a Silver Spring, Md., trade association with dues-paying member organizations across the country. Together the groups collected $2.4-billion for lenders in 2001 and helped thousands of clients repay nagging debts.

Yet few consumers are aware of the close ties these agencies maintain with the credit card industry. For example, William Cullinan, the president and chief executive of the National Foundation, is a former collections director for the nation's largest credit card issuer, Citibank.

Creditors created the foundation in 1951 to educate consumers about responsible spending. They reinvented it 20 years later as a quasi-social service organization offering to rescue consumers from their overspending.

Peggy Schott, housing and education director at Cunningham's agency, summed up the situation succinctly. "We have one foot in counseling," she said, "and one foot in business."

Nonetheless, nonprofits such as Cunningham's argue that they provide a crucial service to consumers at much lower fees than a growing gaggle of upstart competitors.

The growing competition has shaken up the economics of credit counseling. Over the past 10 years, credit card banks and other lenders have reduced their commissions to counseling organizations -- former Texas and New York Assistant Attorney General Stephen Gardner calls them "kickbacks" -- from as high as 15 percent to an average of less than 8 percent.

The cutbacks have forced the counseling agencies to slash expenses, seek funding from the government or United Way, or merge with each other. As recently as 1994, the National Foundation had about 200 members, compared with about 150 today. Cunningham's organization ended last year with a $300,000 loss.

Loyd Cunningham has seen it all in his seven years as a credit counselor. He also has experienced financial despair firsthand. Fifteen years ago, he said, he lost a good job after a corporate merger and remained unemployed for nine months. Credit card debt that once seemed manageable no longer was.

He went to Consumer Credit Counseling Service for help. After three years of sacrifice and discipline, he and his wife repaid the $22,000 they owed. "This was a service that I believed in so firmly that I came back to work for it," Cunningham said.

When Cunningham takes on a new client, he first looks to see if the debtor is delinquent on a mortgage. If so, he'll try to persuade the lender to allow the debtor a year or so to repay what's owed. If not, he moves on to other creditors.

Cunningham flicks on his computer and matches each debt to a database of negotiated agreements compiled by the National Foundation for Credit Counseling. It can be a long process: The client fills out a four-page form with room to list 29 credit cards. Many debtors run out of space.

The National Foundation keeps confidential the deals it has with creditors, but its structure is straightforward. Say, hypothetically, that a debtor owes $5,000 on a Visa credit card issued by the First Imaginary Bank of Brandon. Cunningham's database might indicate a willingness to reduce the debtor's interest rate from 19.9 to 9.9 percent; to waive future late fees; and, after three consecutive on-time payments, to tell credit reporting agencies the account is no longer delinquent. But none of the principal is erased.

In return, the bank would demand a minimum payment of at least 2 percent of the balance ($100 a month). And the bank might pay the credit counseling agency 9 cents of every $1 returned (up to $450).

Cunningham records similar data for each debt. Then he combines the various minimum payments to arrive at a monthly total the client would have to pay: say, $700. That's in addition to the counseling service's initial $25 charge and $25 monthly fee.

Next he reviews the client's income and expenses. If she has a monthly surplus of $725 or more, she's ready to join the repayment plan. If she has less than that -- or a negative cash flow, as many clients do -- Cunningham will suggest fixes. These might include selling the spare car, asking a college-age son to chip in $100 a month for rent, getting a part-time job or taking a bag lunch to work.

If she signs up for the debt management plan, the new client will be required to cut up her credit cards -- some counselors keep them as symbolic souvenirs in giant jars -- and make the first of 48 to 60 monthly payments. Upon completion of the plan, Cunningham will help repair her credit history by contacting credit-rating agencies.

It's a methodology that has worked for thousands of clients across the country, and one reason National Foundation members are considered the industry's gold standard. It's no coincidence that when Good Morning America chronicled a suspicious debt management firm in Los Angeles last month, host Diane Sawyer turned to two trusted sources: the local Better Business Bureau and the National Foundation for Credit Counseling.

But Feinberg, the bankruptcy lawyer whose firm stands to lose money every time Consumer Credit Counseling Service steers a customer away from bankruptcy, described Cunningham's budget-cutting suggestions as "comical."

"Most of these people can't even handle one job, let alone two," he said. "Their finances are in shambles, their personal lives are in shambles."

In fact, half of all debt management plans initiated by National Foundation members end in failure, though chief executive Cullinan said he hoped to reduce that figure. The clients who drop out are left with unrequited debts and none of the protections offered by bankruptcy. These include protection against foreclosure on a home, garnisheeing of wages and harassing phone calls.

A Chapter 7 bankruptcy wipes out 100 percent of a filer's unsecured debts, including credit card bills, although at the price of a damaged credit record.

If the credit counselors think they're busy now, they may not have seen anything yet.

Bankruptcy bills funded and favored by the credit card industry are slowly working their way through Congress. The legislation would fundamentally change the way debtors resolve their debts.

Under it, a person who wanted a fresh start on bills could no longer dial up a bankruptcy attorney and file. He first would need to obtain counseling from an approved agency.

The potential impact on bankruptcy filings is disputed. Some supporters say the numbers would fall by hundreds of thousands. Terry Smith, the federally appointed Chapter 13 trustee for the Tampa Bay area, thinks many filers would not take the counseling seriously. What troubles him more, he said, is the power the new law might give counselors.

"We can't be making value decisions for people," he said. "You know, "You're working 50 hours a week, there's no reason you can't work another 30 hours. Get a job.' "

Cullinan of the National Foundation supports the bill's goals.

There's just one problem, he said. It doesn't provide funding for counseling agencies. "Our organization can't do hundreds of thousands of counseling sessions for free," he said.

-- Scott Barancik can be reached at or (727) 893-8751.

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