Credit counseling teaches consumers how to stay out of crippling debt.
In the United Kingdon, this is known more accurately as debt counseling.
Although credit counseling can provide financially distressed consumers
with valuable assistance, according to the Federal Trade Commission,
some firms may be misleading consumers about who they are, what they
do, or how much they charge. In Commission testimony submitted today
before the Senate Committee on Governmental Affairs, the Permanent Subcommittee
on Investigations, FTC Commissioner Thomas Leary cautioned that some
companies use their non-profit status as a badge of trustworthiness
to attract customers, who are then duped into paying large fees. Those
fees are sometimes funneled to for-profit companies.
Leary explained that instead of teaching consumers about their finances
and how to manage debt as it promised, some credit counseling agencies
(CCAs) indiscriminately enroll their clients in "debt management
plans" (DMPs) without regard to their particular financial situation.
This kind of debt management – under which consumers pay debt
managers who then pay their creditors – can be beneficial for
some consumers, but not for all. "Along with these changes in
the industry have come complaints about troubling practices, including
possible deception about the services offered, poor administration of
DMPs, and undisclosed fees associated with DMPs," Leary said.
Leary stated that the FTC's greatest concern is deception by
CCAs about the nature and costs of their services, including the following
- Failure to pay creditors in a timely manner or at all. Some credit
counseling agencies that offer debt management plans may fail to pay
creditors in a timely fashion or at all. This can result in serious
consumer harm, such as late fees that the creditors impose.
- Promises of results that cannot be delivered. Some agencies promise
that they will lower consumers' interest rates, monthly payments,
or overall debt by an unrealistic amount. Some also make false promises
to eliminate accurate negative information from consumers' credit
- Failure to abide by telemarketing laws. To the extent that these
agencies are not bona fide non-profit organizations, they must comply
with the FTC's Telemarketing Sales Rule, including the National
"The Commission has pursued a vigorous program to halt fraud
and deception by those who purport to be able to solve consumers'
financial difficulties," Leary stated. The testimony listed several
Commission actions, including a November 2003 lawsuit against AmeriDebt
– a large, Maryland-based credit counseling firm that, according
to the FTC's complaint, aggressively advertises itself as a non-profit
dedicated to assisting consumers with their finances. The FTC complaint
further alleges that AmeriDebt advertises its services as "free,"
when in fact the company retains a consumer's entire first payment
as a "contribution."
In addition to the AmeriDebt litigation, Leary explained that the FTC's
law enforcement efforts currently include several non-public investigations
of credit counseling agencies. The Commission's testimony also
mentions a February 2004 lawsuit against two debt negotiation companies
(Innovative Systems Technology, Inc., and Debt Resolution Specialists,
Inc.), a September 2002 lawsuit against another debt negotiation company
(Jubilee Financial Services, Inc.), and numerous cases under the Credit
Repair Organizations Act (CROA), including sweeps like Operation Eraser
and Operation New ID-Bad IDea.
Leary explained that the FTC has engaged in extensive consumer education
efforts to help protect consumers from credit counseling and credit
repair scams. Most recently, the FTC and the Internal Revenue Service
(IRS) jointly issued tips for choosing a credit counseling organization.
Those tips advise consumers to:
- Pay careful attention to the fees an agency charges, the nature
of the services it offers, and the terms of the contract;
- Make sure that creditors are willing to work with the agency the
consumer plans to choose; and
- Consider using agencies that offer actual counseling and education,
instead of simply enrolling all clients in DMPs.
The testimony stated that credit counseling can provide valuable assistance
to consumers in financial distress, and that many, if not most, CCAs
operate honestly and fairly. Consumers who fall victim to the types
of practices discussed in the testimony, however, "may find themselves
in even more dire financial straits than before," Leary said.
He concluded that the FTC remains committed to working with its law
enforcement partners to protect consumers against financial fraud and