The recent recession has been a real boon to credit counseling agencies as many consumers got caught in the debt trap. But, it has apparently been a bit too lucrative for some CCAs as the Federal Trade Commission has launched a crackdown to clean up the industry. Last week, Maryland-based AmeriDebt, DebtWorks, and its founders, were sued by the FTC for misrepresentation of their non-profit status and for deceptive business practices. The FTC charged that the credit-counseling service is setup to make money for affiliated for-profit companies and individuals, rather than operating for charitable purposes. The FTC also alleges that the defendants charged an up-front fee to consumers enrolling in a debt management plan, despite claims to the contrary in their advertising. The companies were also cited for violating privacy laws. The attorneys general of Minnesota and Texas are also in the process of filing a suit against AmeriDebt. Earlier this year, the attorneys general of Illinois and Missouri filed suits against AmeriDebt. AmeriDebt said it will defend itself vigorously against the FTC complaint. On November 1st, the firm says it stopped enrolling new consumer clients and it suspended all television, radio and Internet outreach aimed at attracting new consumer clients. In response to the FTC lawsuit, AmeriDebt/DebtWorks denies any wrongdoing and says consumers need help from independent organizations that are not an extension of the very credit card companies that have encouraged consumers to bury themselves under mountains of debt.
The Federal Trade Commission last week also testified before the House Subcommittee on Oversight of the Committee on Ways and Means. The FTC alleges that the credit counseling industry has changed from small, community-based non-profit organizations to large, high-tech organizations that generate lucrative fees and provide little, if any, personalized credit counseling. In response, the credit counseling industry says the changes are the result of rigid creditor policies, new state regulations, and the control exerted over them by credit card companies. The FTC says the modern day credit counseling firm pushes all their clients into a “debt management plan” without consideration of their particular financial situation. In its testimony, the FTC explained that “DMPs” generate revenue for CCAs in two ways: voluntary rebates from creditors to CCAs; and “contributions” or “donations” solicited by some CCAs from “DMP” enrollees, usually an up-front or monthly fee. The FTC accuses the credit counseling industry of abusing its non-profit status by convincing consumers to enroll in their “DMPs” and pay fees or make donations, claiming that the “donations” will be used to defray the CCA’s expenses, when instead the money may enable the CCA to make a substantial profit. Maryland-based Myvesta says credit card companies dictate the way all credit counseling organizations function. Myvesta says card issuers have silently forced the counseling agencies to perform like paid collection agents. Some even offer collection bounties for certain types of payments. Counseling agencies, in an effort to maintain funding and provide assistance, have been left with no choice other than to comply with the wishes of credit card companies collection departments. Myvesta says credit card companies have gained this control because the current system does not require any funding or cooperation from other major creditors.
The Federal Trade Commission says concerned consumers may call the AmeriDebt case hotline at 1-877-862-0886.