“They hold the handle and we hold the blade,” said the man with the
soothing Caribbean accent at Creative Credit Counselors, Inc., in
Jamaica, Queens. He was talking about the relationship between his
nonprofit credit counseling agency, which is supposed to help debtors
in arrears, and the banks that actually hold the debt. In fact, his
whole industry is now under the knife.
America’s $2 trillion in consumer debt has spawned its own shadow
economy: collection agencies, bankruptcy lawyers, payday lenders, and
debt consolidators whose market is overwhelmingly the desperate. On
May 15, the IRS took a step on behalf of those living in the red. The
government has spent the past two years auditing 63 credit counseling
agencies, together accounting for half the revenue of this $1 billion
industry, which is made up of nonprofit agencies that are supposed to
advise and help people get control of their debt by negotiating lower
interest rates and one monthly payment. Every one of the 41 completed
audits has resulted in termination of tax-exempt status. IRS
Commissioner Mark W. Everson told the Washington Post that more audits and even
criminal investigations are underway: The Post reports the commissioner as saying that many times. . .
. . . the fees consumers paid benefited executives or relatives of executives of the credit-counseling firms.
‘They have poisoned an entire sector of the charitable community,’ Everson added.
These credit counselors sought nonprofit status in the first place
because of a 1997 law limiting the marketing claims made by for-profit
credit repair outfits. Despite their 501(c)3 status, the IRS found,
many of these agencies offer little or no education or counseling,
operate as commercial businesses, pay their executives huge salaries,
and are closely associated with banks and other for-profit entities.
The monthly payments they offer are often too good to be true, set so low as to lock people into years of repayment and multiplying
interest charges. Typically these agencies collect fees of $25 to $50
a month from those enrolled; the bulk of their revenue comes from
“fair share” money directed back to them out of consumers’ payments by
the banks they deal with.
Posing as a prospective client, I reached Creative Credit Counselors
after calling more than a dozen similar outfits in the New York area,
with names like Debt Free After All, Right Choice Solutions, and
Destress Debt.Com (not actually a website). Many had nonworking
numbers. After just a minute on the phone, Creative Credit Counselors,
which said they were accredited by the “banking department,” was ready
to enroll me in a plan. They told me I’d need to make no more than a
$233 monthly payment on $9,000 in credit card debt, an amount set just
over the minimum.
The IRS has cracked down on agencies like this just in time. The 2005
bankruptcy act, among other restrictions and barriers to bankruptcy,
mandated for the first time that anyone filing go see a credit
counselor first. If you’re behind on several cards and looking for
someone to make the creditors stop calling, the best course to take
right now is look for an agency accredited by the National Foundation
for Credit Counseling. In the New York area,
that means just three companies, with multiple locations: GreenPath
Debt Solutions, Money Management International, and
Consumer Credit Counseling Services (both at moneymanagement.org/).