Mel Stiller, president of the Consumer Credit Counseling Service of Southern New England, operates offices in Boston, Rhode Island and Connecticut.

There’s no get out of debt free card for the increasing number of consumers who are falling behind on payments.

But just the same, there are a plethora of nonprofit and for-profit companies jingling phone lines and e-mailing potential clients about the ease of debt consolidation through debt management programs, home refinancings and even quickie bankruptcy filings.

And there are plenty of takers. The National Foundation for Credit Counseling, a nonprofit network of member agencies, said it provided advice for 1.6 million families in 1999.

Although consumer confidence has dipped slightly, the average household expenditure in 1999 was $37,027, according to the U.S. Department of Labor. Many consumers have pushed their spending to the limit, as evidenced in the record number of bankruptcy filings for the second quarter. According to the American Bankruptcy Institute, the figure rose to 400,394, a 24.5 percent increase compared to the same quarter last year. Massachusetts wasn’t included in the list of 10 states with the highest increases.

However, while credit counseling has been a thriving industry, fledgling debt consolidation services threaten to knock legitimate counselors right out of the market, according to Mel Stiller, president of the Consumer Credit Counseling Service of Southern New England and a member of NFCC. Stiller operates in offices in Boston, Rhode Island and Connecticut.

To understand the problem, it’s important to understand the concept of Fair Share, according to Stiller. Stiller wrote about the problem in a recent special issues paper for the NFCC. Credit counselors help people pay their debts on a routine basis. In return, the creditors usually give a percentage of the collected funds back to the counseling agencies and post the debt as 100 percent collected. Creditors have paid the Fair Share – the counseling fee – at a rate of 10 to 15 percent. That percentage is what nonprofit counseling agencies use to pay overhead and expenses.

Enter debt repayment programs that offer no counseling at all.

“What the competition has realized is if you just do debt repayment programs, then obviously it can be lucrative. The difference between them and us is that for only one-third of the people we see is it appropriate to put them in a debt management program. So, the other two-thirds are being counseled free of charge,” said Stiller.

But as a result of the numerous debt repayment companies flooding the market, creditors have decreased the percentage paid to nonprofits. So Stiller’s organization and other agencies that provide counseling find themselves with less money and more clients. Sometimes those clients can be from the very debt consolidators with which he’s in competition.

Stiller said he often receives referrals from those debt repayment companies when they find out through a preliminary prescreening that some people don’t have an income.

Debt payment programs that offer no counseling also present another problem. It is reminiscent of the biblical adage: Give a man a fish and he eats for a day; teach a man to fish and he eats for a lifetime.

The same concept can be applied to people who get into trouble with debt.

According to NFCC spokesman Ken Scott, there are no statistics kept on the number of people who use debt consolidation and wind up getting into financial trouble again. But Scott said he’s heard anecdotal evidence from counselors across the country who “see people who come in because they have consolidated their debt, either through a home equity loan or other refinancing, and did not change their spending behaviors.”

Quick-fix refinancings can lead to disaster, said Elizabeth Renuart, staff attorney with the Boston office of the National Consumer Law Center.

If people refinance their credit card debt with a home equity loan, they may have a false sense of security because the collection agencies have stopped calling. But the problem has simply been shifted to a new venue.

“People who don’t get reputable counseling feel like they don’t owe these bills anymore, but they do owe them. They’re just all stretched out now to 30 years in the new mortgage,” said Renuart.

“If you think about it, do you really want to pay your Sears underwear off in 30 years? The answer would be no, you’d never do that knowingly if you thought about it,” she said. Unfortunately, without the counseling, “People just start using their credit cards again and then they’re in the same boat. So, without the counseling, it becomes a cycle,” she said.

‘Stealth Bomber’
While many companies are legitimate, it seems there is increasing activity in targeted e-mails and telephone calls. Renuart said such methods should be considered a “warning sign.” And just because an organization has nonprofit status doesn’t necessarily mean it doesn’t have an agenda or a bias.

“Anyone who contacts you for that service directly, either through the mail, solicitation by telephone or e-mails to your computer address that you didn’t solicit yourself, I would avoid those,” she said.

In March of 2000, the Federal Trade Commission issued a consumer alert advising that ads promising debt relief may be a thinly veiled funnel into bankruptcy, which is usually considered the last resort.

In February of this year, the FTC filed suit against a company involved in an international telemarketing credit card protection and debt consolidation scam.

“There are a lot of different solutions for people. I think the difference is the people whose banners [banner Internet ads] you’re seeing are looking at one option. One option doesn’t fit all people,” said Stiller.

Stiller said remedies range from creating a budget as a guideline for clients and debt management – meaning the counseling agency takes over a client’s finances until the debts are paid – to taking out a loan to settle debts or even filing for bankruptcy.

“It could be that somebody needs to do something radical like selling a home. I’m not a great proponent of taking out a loan to pay off debt but there are circumstances in which some sort of remortgage could work,” said Stiller.

But consumers need to be smart when choosing which way is best for them. There are no easy answers and refinancing a home for credit card bills usually isn’t the best way to go, said Renuart.

Renuart is quick to say there are many legitimate companies out there.

“The [bad] mortgage company is sort of the stealth bomber, in the sense it can get your house from you faster generally than credit card companies can collect from you through going to court and getting judgments. It’s a much more serious thing to get behind on your mortgage than to get behind on your credit card bills,” she said, adding that getting behind on either will seriously damage credit.

But once consumers get into trouble, it’s tempting to pick up the phone for a promised 20-minute fix. That’s precisely the kind of company consumers should stay away from. Stiller said a company should spend time getting to know the customer to find out what is best for the situation. Stiller’s counselors can spend nearly two hours analyzing the financial profile of consumers before recommending an initial course of action.

“The first thing is to try to gather all the facts, how they got themselves into the problem, what the assets are, what the living expenses are. And the other side of it, where all the money is going, and try to work from there and talk about the different options,” he said.

The numbers can be overwhelming. The typical NFCC client is about 36 years old, married, has a gross annual income of $29,425 and an average total debt of $23,184. That’s not including rent or mortgage debt.

For Stiller’s counselors, the training process can take weeks of studying materials, observing counseling sessions and being observed before they are approved.

Another “lie” being told through some ads is that these companies can fix your credit, said Renuart. The only way to accomplish that is through a good track record, she said.

“You cannot change correct information. It’s going to be there for seven years” before it is considered old information and eliminated, she said. Bankruptcies generally stay on credit reports for 10 years.

“You can eliminate old information, correct incorrect information and live with the truth. That means you have to start establishing yourself anew, and credit counselors can help you do that. The reputable ones can help you do that,” she said.

Debt Programs Not Always A Credit to the Profession

by Banker & Tradesman time to read: 6 min
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