Deeper in Debt: Fradulent debt reduction services
By: Source: AARP Bulletin Today Date Posted: June 2004
After her divorce six years ago, Jolanta Troy, 49, was facing financial ruin. She had one income, two children, three mortgages and creditors circling like buzzards.
Declaring bankruptcy seemed to be her only option—until she saw a television ad for a nonprofit credit counseling agency, Maryland-based AmeriDebt. Troy, who lives near Harrisburg, Pa., called immediately. A counselor promised to get her loan amounts reduced and credit card interest rates slashed, Troy recalls, if she set up a debt management plan.
Under the plan, Troy agreed to make what she believed was one consolidated monthly payment of $783 to AmeriDebt; it in turn would pay her creditors.
A month later, Troy was stunned to get calls from these creditors demanding payment. AmeriDebt had kept her monthly payment as a "voluntary" service fee, she later learned. She also discovered that AmeriDebt hadn't negotiated with her creditors to lower her debt or interest rates.
"I didn't know what to do," says Troy, a native of Poland. "Another month was gone, and I was late with my credit cards. I had no one to turn to." Troy was forced to file for bankruptcy in 2001.
The credit counseling industry has come under fire lately for what regulators and consumer advocates say is widespread abuse. Some of the largest companies charge excessive fees, hide up-front service charges and use their nonprofit status as "a badge of trustworthiness" to draw customers who are then duped into paying large fees, Federal Trade Commission member Thomas Leary told a Senate panel in March.
In numerous cases, he said, credit counseling agencies received monthly payments from their clients in debt management plans but failed to turn over those funds to their creditors on time, if at all. The FTC has filed fraud charges against five agencies in the last two years, including AmeriDebt in November and the National Consumer Council in May.
The commission said the National Consumer Council masqueraded as a nonprofit debt negotiation company and made millions deceiving consumers by promising to reduce their debt. A financial guardian has been appointed to take over the firm's operations. AmeriDebt, the FTC charged, deceived customers by falsely advertising that it charged no up-front fee and by calling itself a nonprofit that teaches consumers how to handle finances. The firm filed for Chapter 11 bankruptcy protection in June.
Bethany Matz, an FTC attorney, says, "Just because an organization advertises itself as a nonprofit doesn't mean it's legitimate or that its services are affordable."
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