The Washington Post, Nov 4, 2001

Easing the Credit Crunch?; AmeriDebt Is One of a Breed Of New Debt-Counseling Firms Whose Business Practices Are Drawing Regulators' Attention. (Financial) Caroline E. Mayer.

"AmeriDebt gave me my life back," says the satisfied customer on the late-night television ads promoting the Germantown credit-counseling service.

After a long spending spree, many Americans are struggling to pay off their credit card balances, especially as the economy slides into recession. Every month, thousands of debt-choked Americans seek help from companies such as AmeriDebt, one of a new breed of debt-counseling firms that heavily advertise their promises to rescue clients from mounting bills.

Debt counseling has been available for decades -- usually from community-based nonprofits that negotiate directly with credit card companies to lower interest rates for their clients and eliminate late fees. They often operate out of austere offices, meeting clients face to face.

The new companies offer the same services but tend to promote themselves more heavily on TV, radio and the Internet, and they do most of their work over the phone. They are nonprofits as well -- but regulators and consumer advocates have begun questioning some of their business practices.

For example, some of the new firms seek "voluntary contributions" upfront from their customers, at a time when they are struggling financially, while many of the low-key community groups rely on grants and funding from the credit card companies themselves. Also, some of the newcomers pay sizable fees to outside for-profit firms with ties, past or present, to the debt-counseling executives.

Concern over the voluntary contributions, "extensive advertising" and generous salaries of some credit-counseling executives prompted Eric S. Friedman, investigative administrator in Montgomery County 's consumer affairs division, to write to the Internal Revenue Service this summer, asking it to look into the nonprofit status of debt-adjusting firms.

The new companies say they perform a great service, that they are more efficient than traditional counselors and take some of the shame out of the debt-counseling process.

Some regulators and consumer advocates worry that vulnerable consumers will turn to the first counseling firm they hear about, without comparison-shopping. In the process, advocates say, the clients can end up paying high fees in advance that may push them deeper into debt.

"Consumers should not let down their guard just because a credit-counseling agency calls itself nonprofit," said Bennett Rushkoff, senior counsel of the District's Office of the Corporation Counsel. "It is very easy to set up a nonprofit counseling agency and use the counselors to sell the services of a related for-profit company."

Of the 2,500 or so credit-counseling organizations that credit-industry executives estimate exist, 1,450 are local offices of the National Foundation for Credit Counseling. Sometimes considered old-fashioned, the foundation has been around since 1951. Its Consumer Credit Counseling Service (CCCS) offices advised 1.6 million families in 2000. More than half a million people joined its Debt Solver Program last year, with its clients repaying nearly $2.6 billion in debt.

By comparison, the new breed is small and eager for new business. With an aggressive advertising campaign that cost between $10 million and $15 million last year -- a third or more of its revenue -- four-year-old AmeriDebt is signing up an average of 8,000 new customers a month from across the country. Its revenue has grown from $2.2 million in 1997 to more than $30 million last year.

Working the Phones

To answer calls generated by its commercials, AmeriDebt has about 255 counselors, two-thirds of them in its Germantown facility. The rest are in Broward County , Fla.

In Germantown , the counselors sit in beige cubicles, flipping through notebooks to answer new customers' questions about how much each creditor might be willing to reduce interest rates. As one recently responded to a caller: "We can get that 22 percent rate down to 12.99 . . . you get your bills paid off in three to six years."

Around the office, "goal boards" are strategically placed to show how many customers each counselor spoke with during the previous month. Periodically, the company gives financial incentives to the counselors -- to keep them from becoming "lackadaisical," said AmeriDebt attorney Julian Spirer.

To some, AmeriDebt is a godsend.

"They saved my life," said Lurle Jackman, a Queens , N.Y., billing administrator for a major telecommunications firm. Her finances "were out of control" when she heard the firm's radio ad in March, she recalled. She owed more than $15,000 on six different credit cards, some of which charged as much as 25 percent interest. AmeriDebt negotiated some of the rates down to 9.5 percent.

Jackman was not bothered by AmeriDebt's request for a voluntary contribution. "They're a nonprofit organization, so they have to be paid somehow," she said.

AmeriDebt isn't alone in asking clients to help fund the firm's costs. Some other newcomers do as well, and traditional debt counselors have started to ask clients for help. Until recently, they have been primarily supported by credit card companies willing to share in a percentage of whatever debt was repaid. It was a better alternative to a consumer's bankruptcy, where creditors might get no money. But in recent years credit card companies have reduced their support of credit counselors, trimming their contribution from about 15 percent of the money received from consumers to 8 percent.

Nationally, the CCCS groups now ask an average $16 initial fee and an $11 monthly processing fee. The CCCS of Greater Washington charges no fee.

In its contracts, AmeriDebt asks customers to make a voluntary contribution that is equal to one month of the clients' scheduled debt repayments. AmeriDebt says the typical upfront contribution is about $220. In addition, customers contribute an average of $35 a month to have their accounts processed.

What some AmeriDebt customers don't appear to realize is that their contract designates their first payment as the voluntary contribution and therefore is not used to reduce their debt. Jim Reed was one of those customers.

Reed, a 27-year-old marketing coordinator who lives outside Philadelphia , filed a complaint earlier this year with the Better Business Bureau. In an interview, Reed said he was attracted by AmeriDebt's ads because he owed $21,000 on five credit cards and saw an opportunity to get lower interest rates.

But four months after signing up, Reed said, his debts had grown by $5,000. Part of the problem, he said, was that he didn't read his contract carefully and didn't realize that his first monthly payment of $456 went to AmeriDebt instead of going to pay off his bills.

When his creditors didn't receive that month's payments, Reed said, he was charged late fees, over-the-limit penalties and higher interest rates. "My credit had been absolutely spotless, but now it's ruined," he said.

Reed is one of 171 people who filed a complaint with the local BBB about AmeriDebt in the first 10 months of this year, making it one of the most-complained-about companies in the Washington area. The Federal Trade Commission has received 19 complaints this year. As is standard policy, a spokeswoman declined to say whether the agency was conducting an investigation.

Given the volume and nature of complaints, the BBB has given AmeriDebt an "unsatisfactory" rating. "That's basically the bureau's definition for caveat emptor: buyer beware," said Edward J. Johnson III, president of the BBB of Metro Washington DC.

Jeffrey Formulak, AmeriDebt's director of operations, said the rating is unfair. "Complaints are less than one-quarter of 1 percent or our customers," he said, adding that customers already on the brink of financial disaster are more likely to complain.

As Formulak wrote the BBB in response to Reed's complaint: "Mr. Reed is assigning blame to AmeriDebt and everyone else who allegedly caused the debt despite . . . [our] 'best effort' attempt to cure a debt problem that took years for Mr. Reed to create. There are times when . . . you have to be willing to take a small step backward to go forward and accept responsibility for accumulating debt."

AmeriDebt officials say the upfront contributions it and other credit-counseling firms receive from clients are needed to demonstrate a consumer's commitment and to cover the costs of counseling when they are the greatest, at the start of the program.

Formulak said the upfront contribution is strictly voluntary; about 10 percent of AmeriDebt's customers make no contribution, and 6 percent contribute less than the suggested amount.

In response to the complaints, the firm added a new page to its standard contract to make the contribution policy clearer. It doesn't specify that the contribution is taken from the first month's payment.

Legal Troubles

AmeriDebt sends its account-processing business to Andris Pukke, 32, whose credit companies have gotten him into legal trouble twice in recent years.

In September 1996, Pukke pleaded guilty in Pittsburgh to a federal charge of trying to defraud consumers by falsely promising debt-consolidation loans. The U.S. attorney said Pukke collected more than $38,000 in what the U.S. attorney's office called a "sham" lending operation.

Pukke agreed to refund the money and not engage in any advance-fee-for-loan operation in the future. He was sentenced in December 1996 to three years' probation and fined $5,000. Pukke said his attempts to help financially struggling consumers "sort of backfired, didn't work out too well."

In the same month Pukke was sentenced, his wife, Pamela Shuster, started the AmeriDebt credit-counseling nonprofit in Germantown . She served as a director until she resigned in 1999 after the birth of the couple's second child.

Across the parking lot from AmeriDebt's headquarters on Middlebrook Road is Pukke's new enterprise, DebtWorks, a for-profit company founded in late 1999 that processes client accounts for nine credit-counseling firms, forwarding consumers' monthly payments to their credit card companies and handling customer phone calls. DebtWorks' first client was AmeriDebt. Another is a credit-counseling nonprofit run by Pukke's brother.

AmeriDebt remains DebtWorks' largest client, paying it about $1 million a month to handle 75,000 active accounts.

DebtWorks charges the credit-counseling firms $100 for each new client and an additional $25 monthly fee for each client account it processes, which is a standard fee, experts said.

AmeriDebt officials say its decision to retain Pukke's DebtWorks was made after Shuster had resigned and only after the board had determined that DebtWorks offered the most cost-effective way to process accounts.

Pukke also heads Infinity Resources Group Inc., a for-profit lender that has received referrals from AmeriDebt for debt-consolidation loans.

The District sued AmeriDebt, Infinity and Pukke in 1999. According to the suit, the first monthly payment of AmeriDebt customers often went to Infinity, which promised a debt-consolidation loan if the customers made their next six monthly AmeriDebt payments on time. But, the D.C. suit said, "the overwhelming majority of consumers" who paid advance fees and made timely payments never received loan approval from Infinity. The suit was settled in May 2000; the defendants agreed to make refunds without admitting any wrongdoing.

In an interview, Pukke said he earns about $170,000 a year from the two firms -- $120,000 in salary from DebtWorks and $50,000 from Infinity's profits.

Pukke said it's frustrating to hear criticism about credit-counseling firms. "No one ever talks about the good these companies are doing for people, helping hundreds of thousands of people get out of debt by saving them thousands in interest and late fees," he said.

For example, if a consumer owes $11,000 on six credit cards and he paid $220 a month, it would take him nearly nine years and $12,000 in interest to pay off his bills, according to AmeriDebt attorney Spirer. But, he said, if he went to an AmeriDebt counselor, his interest rates could be reduced and his late fees wiped out, so his debt could be repaid in a little over five years, with only $3,100 in interest and $3,000 in contributions to AmeriDebt.

Genus and Amerix

One of the first and still the largest of the credit-counseling newcomers is Genus Credit Management, a nonprofit that was started in Maryland (initially under a different name) in 1992 by Baltimore businessman Bernard Dancel after his own financial difficulties prompted him to look for alternatives to the traditional credit-counseling firms.

Four years later, Dancel launched another firm, a for-profit company, Amerix, to handle the processing of accounts for debt-counseling firms, including those of Genus. Dancel headed both firms until early 1998, when he left Genus, which still relies on Amerix for its back-office operations. Genus's latest tax return shows that in 1999, $75 million of its $106 million in revenue went to Amerix.

Michael Croxson, Amerix's chief operating officer, said Genus decided to use Amerix because it was the only processor large enough to handle its volume. Genus continued to rely on Amerix, he added, after an independent auditor, the Andersen accounting firm, reviewed its price and capability. Amerix currently serves three other counseling companies as well.

. . . and Cambridge

Cambridge Credit Counseling Corp. of Massachusetts is another nonprofit debt counselor, one that does substantial business with a for-profit company owned by its president. It also seeks upfront fees equal to the first month's consolidated payment. Cambridge calls this a "payment design fee."

Cambridge offers an unusual incentive to clients who keep their accounts current. After six consecutive timely payments, Cambridge will split with the consumer the amount of funds it receives from the creditor for arranging the debt payback. Cambridge officials say that under that "fair share" policy, consumers more than recoup the amount of their initial fee.

Cambridge is signing up about 5,500 new clients a month. Annual revenue for the fiscal year that ended July 31, 2000 , was $23.4 million.

Cambridge does its processing in-house but does other business with a company owned by its top officer. Company officials say Cambridge paid $940,000 in 2000 to a debt-referral company owned by its president and founder, John Puccio.

It also paid $1.3 million in principal and interest to Puccio and his brother, Richard, a Cambridge vice president and director, as part of a 50-year, 7 percent note to cover Cambridge's $14.1 million purchase, in 1996, of two for-profit credit-counseling firms started by the Puccios.

Cambridge officials said the purchase price was determined through an outside appraiser, an arm of the accounting firm BDO Seidman, and approved by the independent members of the board of directors. They also approved Cambridge 's dealings with the debt-referral firm owned by John Puccio.

Its latest tax return also shows the Puccios were each paid a salary of $312,000 for the year ended July 31, 2000 . Cambridge officials said these salaries were comparable with others in the industry and provided The Washington Post with tax documents of three other credit-counseling firms, including that of Genus, whose president made $354,000 in 1999. AmeriDebt's Formulak currently earns about $140,000 a year.

In 1996, the Securities and Exchange Commission barred Richard Puccio from associating with any broker-dealer for five years after it found he "engaged in high-pressure, fraudulent sales tactics" and made "material misrepresentations" about stocks he sold.

Cambridge attorney Paul Kaplan said the SEC citation is irrelevant to Puccio's current job. "He paid his penalty, there were no criminal charges, and he doesn't get involved with customers, customer accounts or funds," Kaplan said.

A Growth Industry

With a stagnant economy and near-record rates of personal bankruptcy, debt counseling is already a growth industry. And a pending bankruptcy bill in Congress should generate more customers: A provision requires consumers to consult with credit counselors before seeking bankruptcy protection.

The IRS has the authority to police nonprofits, but Tom Miller, acting director of the IRS's exempt-organizations branch, said the government is not currently looking at debt-counseling firms.

But he said individual firms could be targeted for an examination if the IRS believes a nonprofit entity is "charging fees way in excess of its costs, accumulating funds for the private benefit of private shareholders or individuals -- by funneling business to a for-profit entity -- or by not conducting its activities in a charitable manner."

For the most part, though, regulation of credit-counseling firms is left up to the states. Many, such as Maryland , do prohibit advance fees for debt counseling, but state regulators and industry officials say these laws do not always apply to nonprofit organizations.

When it comes to state regulation, said Travis Plunkett, legislative director for the Consumer Federation of America, "the truth is, it's a free-for-all."

Staff researcher Richard Drezen contributed to this report.

The New York Times, Jan 20, 2002

Credit Counselors Have Problems, Too. (Money and Business/Financial Desk) Sana Siwolop.

LAST year was particularly busy for the multibillion-dollar credit counseling industry. With the economy in a recession and consumer debt and unemployment rising, millions of people turned to the industry's roughly 800 nonprofit agencies or for-profit companies for help in managing their bills.

But the industry has had its own share of problems. For one thing, many creditors that provide a portion of the money for the credit counselors' operations pared their contributions -- called fair-share funds -- even more last year, to 8 percent or less from 15 percent a decade ago, industry executives say.

Adding to the industry's woes were reports last year of some companies charging high fees for substandard service, and questions about whether some groups were truly nonprofit.

''This is an industry that is in turmoil right now,'' said Travis B. Plunkett, the legislative director for the Consumer Federation of America.

Yet consumer advocates like Mr. Plunkett say credit counseling can still work for many people -- as long as they find a reputable agency that is appropriate for their needs.

Of course, that may not always be easy in an industry that is largely unregulated. Because many credit counseling organizations have set themselves up as nonprofit entities, the Federal Trade Commission has no authority over them. Only 17 states -- including New York , New Jersey and Connecticut -- regulate credit-counseling concerns, usually by requiring licensing or other authorization for conducting business. (By contacting their state banking departments, however, consumers may be able to learn whether a particular agency or company has had complaints lodged against it.)

There are also many counseling services from which to choose, some with similar-sounding names.

''It's a difficult time for legitimate credit counseling organizations when there are so many well-funded competitors out there that are not adhering to what we think is a basic set of principles for the industry,'' said Bill Cullinan, interim president of the National Foundation for Credit Counseling in Silver Spring, Md., the largest credit counseling network, with 1,450 local offices.

Mr. Cullinan said he was especially concerned about credit counseling companies offering services online or over the telephone that automatically put clients in debt repayment plans rather than providing true financial counseling that could help them avoid problems. By contrast, he said, the foundation's member agencies focus on counseling and place only about one-third of the people who seek their services into such plans, usually when their total debt obligations outside of mortgages, auto loans or rent are 80 percent to 90 percent of their gross incomes.

Before they agree to work with a company or agency, consumers should ask the counselors about specific services they provide, experts say. Will they be taught about proper budgeting? Will they be placed automatically into debt-repayment plans? Will they be urged to buy additional products or services? How much will it all cost?

Some consumers may have wished they had asked those questions. One of them is the owner of a home-based apparel business in the Los Angeles area, who asked that he not be identified. The weak economy, he said, had made him fall behind in paying his bills, and he sought the help of a credit counselor, Debticated Inc. in Huntington , N.Y. He said he was assured by the company that he would be charged nothing in advance and that the interest rate on some of his credit cards would be lowered.

He said he found in early December that his first month's payment of $1,529, which had been billed as a voluntary contribution, would go entirely to the company rather than his creditors. He said he also discovered that his interest payments would be far higher than he had been told.

He complained to the company and resigned from the program. In two weeks, he said, he got his money back.

Rory Mulholland, a lawyer for Debticated, said the consumer in question could have stayed in the company's debt-payment program without paying the voluntary contribution. He also said the company could not promise specific interest payments because it dealt with hundreds of creditors.

JOEL GREENBERG, the board chairman for the nonprofit Association of Independent Consumer Credit Counseling Agencies in Fairfax , Va. , which has 54 agency members, says his members are allowed to charge consumers no more than $75 to set up a debt management plan and no more than $50 a month in maintenance fees. Members of the National Foundation for Credit Counseling are not required to limit their fees but most charge, on average, $25 to $40 for set-up fees and $12 a month for maintenance fees, Mr. Cullinan said. Some of the organization's members do not charge for their services, he added.

Both organizations say their members are not permitted to pocket a client's first debt payment.

Mr. Plunkett of the consumer group said people should ask companies how much time and money they spend on counseling.

Some companies vigorously defend their fees. The Cambridge Credit Counseling Corporation in Agawam , Mass. , for example, charges a mandatory, rather than voluntary, upfront fee equal to a consumer's total monthly debt; it also charges a monthly maintenance fee that is 10 percent of the monthly debt payment. Chris Viale, the company's general manager, said the fees were necessary because they ensured that the company could provide extra services and because fair-share contributions from creditors had fallen to 6.2 percent, on average. ''A year ago we were almost at 12 percent,'' he said.

In exchange for the higher fees, he said, Cambridge Credit Counseling provides consumers with certain perks, like a rebate program. Clients who make full payments on time can get back 3 percent to 3.5 percent of their payments every six months, he said.

Mr. Viale said that of the 35,000 to 40,000 households that his company works with each month, only 15 percent end up in its debt-management program. The rest, after working with a company representative for about a half-hour, receive a set of financial workbooks, a two-hour video and access to an online education center. ''It would be impossible for us to continually counsel consumers,'' Mr. Viale said.

Credentials are another consideration for consumers. The National Foundation for Credit Counseling and the Association of Independent Consumer Credit Counseling Agencies have differing sets of standards for their members and provide accreditations.

Mr. Plunkett advised consumers to resist signing up with the first credit counselor they encounter. ''When it comes to debt problems, consumers often feel a sense of urgency,'' he said. ''But shop around.''