FOR THOSE drowning in debt, the pitches must seem like a life preserver.
Credit counseling and debt management agencies promise to end collection calls, eliminate late fees and reduce monthly payments by half or more.
But consumer advocates advise using caution when choosing an agency to stay afloat. The industry has exploded in recent years, and there are more than 1,000 agencies, up from about 200 a dozen years ago, experts said.
Their growth has been fueled by rising consumer debt, which tops $1.7 trillion, and the Internet, which allows some to serve a national audience. There are good players, but plenty of bad ones, too, experts said.
The practices of some are getting attention from regulators.
Illinois sued AmeriDebt, a Germantown debt manager, this month. The state claims that AmeriDebt charged debtors excessive fees and failed to forward payments to creditors, resulting in late fees and other penalties that put consumers deeper in debt.
AmeriDebt said it is working with Illinois regulators to address concerns, but maintains that its fees are voluntary, with only a few cases of payments not being forwarded on time. The nonprofit added that it has helped officials in other states to fight fraud in the industry.
Agencies negotiate with credit card issuers and other unsecured creditors for lower interest rates and the elimination of late fees and other penalties. Debtors make a monthly payment to the agency, which pays creditors.
Regulation is left up to the states. Most states have laws governing debt managers and credit counselors, but often nonprofits are exempt or enforcement is weak, said Deanne Loonin, a staff attorney for the National Consumer Law Center. Most agencies are nonprofits.
Legislation to license the groups in Maryland failed last year. The legislation was reintroduced this year and includes a limit on fees. Under the bill, an initial setup fee cannot exceed $50, and monthly fees could be up to $5 per creditor, but no more than $50 total.
Until more consumer protections exist, debtors must do their homework before signing up with an agency. Here are things to consider:
Nonprofit is no guarantee. Often agencies promote their nonprofit status in advertisements.
"It's a great marketing tool," said Eric Friedman, investigative administrator for Montgomery County's Division of Consumer Affairs. "Nonprofit to consumers is a badge of legitimacy. Nonprofit doesn't necessarily mean legitimate."
The agencies receive nonprofit status because they claim to provide educational services. But Friedman said some agencies exist only to push debtors into debt repayment plans that generate money for the agency or a related for-profit company. "They are a collection agency disguised as a charity," he said.
Check complaints. Contact the state's attorney general's office or the local consumer affairs department for complaints.
Also, check complaints lodged with the Better Business Bureau at www.bbb.org. The bureau's latest figures show 832 complaints about debt and credit counseling agencies in 2001, compared with 404 in 2000.
Understand fees. Agencies are supported by creditors, which don't want consumers filing for bankruptcy. Still, creditors have been reducing or eliminating payments to agencies, causing them to seek contributions from debtors.
Complaints are that agency fees sometimes aren't clearly disclosed or that consumers don't realize a hefty upfront payment is going to the agency, not their creditors.
Contributions vary. The National Foundation for Credit Counseling, the umbrella group for the Consumer Credit Counseling Services that have been around for decades, said some of its agencies don't ask for contributions. Most do, though, but contributions are voluntary. Average contributions are $14 for a budgeting session and $19 to enroll in a debt management plan plus $12 a month.
AmeriDebt asks for an initial contribution of 3 percent of total debt plus a monthly contribution of $7 per creditor. That averages out to $281.57 for the initial contribution and $28.49 per month, a spokesman said. AmeriDebt said it doesn't ask for contributions from Marylanders, and has returned $500,000 in slightly more than a year to consumers nationwide who said they didn't understand fees were optional.
Look for individual service. Sometimes consumers merely need help with budgeting, and they should be wary of agencies that push them into debt management plans, experts said. Some agencies' counselors are really sales people whose compensation is based on how many people enter debt repayment plans, said Travis Plunkett, Consumer Federation of America's legislative director.
"What you need to look for is good service, people who really try to understand your finances and your situation, who don't offer you a one-size-fits-all debt management format," he said. "If they offer you a debt management program after eight minutes on the phone, hang up."
It's better to meet face-to-face with a counselor, who develops a plan that helps you meet all your debt obligations, not just credit cards, Plunkett said.
To suggest a topic, contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose @baltsun.com.