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Living with credit, Protecting yourself

Nonprofit agencies should open their books

Fred Williams

What does “nonprofit” mean to you? Maybe you picture a storefront office staffed by people wearing Birkenstocks.

You probably don’t picture 24-hour call centers, multimillion-dollar revenue streams and executive paychecks that rank in the wealthiest 1 percent.

And you might be shocked at an agency that pays fat fees to its CEO’s software company on the side, plus handsome salaries for him, his wife, his son, two brothers-in-law, and his 95-year-old father.

Welcome to the real world of nonprofit credit counseling, where millions of people come for help getting out of debt.

credit-counseling.jpgCreditCards.com is running a series of stories this week that pulls back the curtain on the rapidly changing sector. Not long ago, most of these agencies were in local storefronts, and face-to-face counseling was the norm. Now those offices are being swallowed up into big, technology-heavy operations.

Oversight of the agencies has not kept up. Their regulator, the Internal Revenue Service, keeps its lengthy deliberations behind a screen of secrecy. The IRS found that the head of Take Charge America was taking questionable benefits for himself and his family back in 2005. When the Phoenix-based agency fought the loss of its nonprofit status, the appeal process ground on for six years.

For another thing, the agencies themselves hold their cards close to the vest. Graduation rates, which would help debtors understand what they’re getting into, are rarely published. Credit counseling industry averages show that about half of repayment plans fail — and competitors say even that figure is optimistic.

Back in 2004, Raymond Schuck’s story illustrated the pitfalls of nonprofit credit counseling. Schuck had gone to a Massachusetts agency for help repaying $90,000 in credit card debt. He was put on a plan with a $1,949 monthly payment, including a $194 monthly fee. In fact, Cambridge Credit Counseling kept the first month’s payment as a setup fee. Creditors came after Schuck for the money, and ultimately he filed for bankruptcy.

“Mr. Schuck … assumed that, because Cambridge was nonprofit, he could trust them,” said the report by congressional investigators.

After Congress and the IRS cracked down on the sector, the worst abuses were driven out. Counseling mills that lured people like Schuck into expensive traps were shuttered or overhauled with new leadership. Cambridge restructured under new management.

But people are still losing large amounts to credit counseling. They’re just losing it over longer periods, as they drop out of debt repayment plans that carry fees of up to $50 a month. Now, Cambridge is one of the few large agencies that publishes its graduation rate, so debtors know what they’re getting into before they pick an agency.

Today, oversight should mean more than stopping outright rip-offs like what Schuck experienced. Debtors should know their odds of success at different agencies. And management practices such as what the IRS found at Take Charge America shouldn’t be allowed to continue for years without public disclosure.

People still assume, as Schuck did, that they can trust a nonprofit.  That has never been a safe assumption. Trust should be earned, with transparency.

Editor’s note: Fred O. Williams is the writer of the CreditCards.com series on the nonprofit credit counseling industry, “Your debt, their business.” Fred has been a business journalist since 1986 and his credits include the book, “Fight Back Against Unfair Debt Collection Practices.” He joined CreditCards.com as a senior reporter in 2012.

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  • Anonymous

    Will Fred O. Williams be doing another story on the pay of CEO’s at credit counseling agencies once their tax returns for 2013 are due to be filed in Mid-November, 2014?