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Debt repayment businesses burgeoning

Dozens of newcomers have popped up, lured by the promise of debt-collection commissions from creditors. But questions have been raised about the integrity of some, and government agencies are cracking down.

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


For years, nonprofit members of the National Foundation for Credit Counseling enjoyed a near monopoly over the debt repayment business.

Not anymore. Drawn by the promise of debt-collection commissions from creditors, dozens of newcomers have descended on the business in recent years. Some send out mass e-mail solicitations with exaggerated claims. Others carry ads on television and radio. Together they have captured almost half the market share.

But consumer advocates are raising questions about some of the newcomers, and government agencies are cracking down on deceptive advertising.

"The new breed, as far as I can tell, is primarily a scam," said Eric Friedman, a lawyer and consumer advocate with the Montgomery County, Md., housing and community affairs department.

One common complaint is that some of the new players do not offer face-to-face counseling. Another is that they rush clients into debt repayment plans. (National Foundation members enroll just 30 percent of their clients in a plan.) Still another is that they charge high fees and avoid helping clients with creditors that don't pay commissions.

"We are the real counseling agency," said Peggy Schott, housing and education director at the Consumer Credit Counseling Service of Central Florida and the Florida Suncoast, which serves Pinellas and Pasco counties.

One of the better known competitors, AmeriDebt of Germantown, Md., charges an upfront fee equal to 3 percent of a client's total debt and a monthly fee of $7 per creditor. So a client who owed 10 creditors a total of $20,000 would pay a one-time fee of $600 plus $70 per month. By contrast, Schott's agency charges an upfront fee of $25 plus $25 a month.

High fees aren't AmeriDebt's only problem, according to a 1999 lawsuit filed by the District of Columbia. The suit accused AmeriDebt, a nonprofit organization, of funneling debt consolidation loans to a for-profit company, Infinity Resources Group, owned by its former president. Infinity and the District eventually settled the suit for a reported $2-million. The defendants denied all allegations.

AmeriDebt executive director Jeff Formulak said his company is misunderstood. He said its fees are "voluntary," even though as many as 90 percent pay them. And although AmeriDebt still refers some clients to Infinity, the two companies are unrelated, he said.

The controversy hasn't hurt sales. AmeriDebt has about 96,000 customers on its debt management plan.

"I move forward, and a lot of people, especially in the press, seem to want to dig up things that happened three years ago," he said.

Friedman, the consumer advocate, is particularly disturbed by companies that imitate the "Consumer Credit Counseling Service" name and incorporate as nonprofits. The Federal Trade Commission can regulate only for-profit companies.

Then there's the Web site called ConsumerCreditCounseling.com. The site asks visitors to submit intimate financial details, but it doesn't reveal even basic details about itself, such as an address or phone number.

Visitors to the Web site also are treated to a popup advertisement. The product? A credit card.

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