Kim Geiger

April 22, 2010 | 8:26 p.m.

Reporting from Washington

A new report by undercover government investigators bolsters longstanding concerns that companies promising to help consumers overwhelmed by credit card and other debts often turn out to be financial predators that charge high fees but deliver little or nothing in return.

When investigators for the Government Accountability Office posed as distressed consumers seeking help, so-called debt management companies gave them wildly exaggerated descriptions of the firms’ success rates and sometimes promised savings of as much as 50 cents on the dollar, Gregory Kutz, the GAO official who ran the investigation, told Congress on Thursday.

But after paying big up-front fees, often running to several thousand dollars, many consumers end up deeper in debt than they were before seeking help, Kutz said.

Such practices — deemed “fraudulent, deceptive and abusive” by the GAO — have caused complaints about debt relief companies to more than double since 2007, according to the National Assn. of Attorneys General.

Also “particularly despicable,” Kutz said, was that three of the companies used Christianity to target customers. Investigators visited one of those companies, A New Beginning Financial located in a strip mall in Orange, where an agent told them that it was a nonprofit ministry, with profit funding missionary trips overseas.

The Federal Trade Commission is considering new rules to prevent debt settlement companies from charging up-front fees and giving inaccurate information about their programs.

Sen. John D. Rockefeller IV (D-W.V.), who ordered the GAO investigation, called the practice “appalling beyond words.”

“These debt settlement companies are kicking people when they are down,” Rockefeller said Thursday at a hearing of the Senate Commerce, Science and Transportation Committee, which he chairs.

Advertisements by debt management companies, as well as statements by company representatives to GAO investigators, provided evidence that the firms lead clients to believe their services are part of a government program similar to the recent bailout of troubled banks.

One company advertised a “U.S. National Debt Relief Plan,” while another said it offered a “government authorized” program.

“It is government approved,” a company representative told investigators in a taped conversation. It was one of 20 firms that the GAO contacted in its undercover inquiry.

Jeremiah Martin, who heads FreedomDebt.com, one of the websites contacted by investigators, said in an interview that his company instructs clients to halt credit card payments because the company only accepts consumers who are unable to pay their bills.

“Our program is a hardship program,” Martin said. “In order to enroll in our programs, they have to voluntarily agree not to pay their creditors.”

In addition to suggesting government backing, the GAO said, companies often tell hard-pressed consumers to stop making payments on their credit card bills and instead to send periodic lump sums to the debt management firms. Those payments are often applied first to the companies’ fees before it will begin settling the debt.

“In the most egregious cases, 100% of the consumers’ first three or four monthly payments were used for fees,” Kutz said.

Company agents tell consumers that halting regular credit card payments will entice creditors to negotiate lower repayment amounts — and they brush off the possibility that doing so can ruin a consumer’s credit or spark legal action.

“A judgment is nothing more than a fancy IOU,” another agent said, according to the GAO report.

The companies attract customers by promising swift debt relief.

One website ad read, “If we can’t get you out of debt in 24 hours, we’ll pay you $100!” Investigators visited the company at its Florida address, where the owner told them that the ad was a “typo” and should have read “24 months” instead.

John Ansbach, legislative director of the U.S. Organizations for Bankruptcy Alternatives, an industry trade group that represents debt settlement companies including some of the firms investigated by the GAO, acknowledged that the industry was troubled.

“It’s very clear to us that we have significant challenges in our industry,” Ansbach told lawmakers.

Copyright © 2010, The Los Angeles Times

When trying to pay off debt, one of the options a consumer may consider is a debt management plan.

Through a debt management plan, a consumer works with a consumer credit counseling service. According to the Federal Trade Commission, consumers give the counseling service money, which it then uses to pay off debt for the person.

The advantage of a DMP is that a consumer credit counseling agency may be able to negotiate with lenders to get lower rates. However, the FTC notes there are some things consumers need to do if they are in such a plan. They need to make sure to make payments on time, and they should check their monthly statements in order to ensure their lenders are getting the money.

“You need to be aware that if payments to your DMP and creditors are not made on time, you could lose the progress you’ve made on paying down your debt, or the benefits of being in a DMP, including lower interest rates and fee waivers,” the FTC’s website said.

Along with setting up a DMP, consumer credit counseling agencies can help consumers in setting up a monthly budget. Doing so would involve examining a person’s income and expenses and then determining where the consumers can find some savings, which may include cutting back on unnecessary costs.

Debt settlement is one way that consumers may be able to find some help when it comes to money management.

A consumer credit counceling agency can refer a consumer to a debt settlement company, which in turn can negotiate with lenders in order to reduce the amount a consumer owes on things like credit card debt. In a recent story for articlesbase.com, Vincent Polisi, founder of the rent-to-own firm Finance the Dream, noted that creditors would rather get some of the money they are owed rather than none at all.

“With debt settlement, you will be negotiating with creditors for them to reduce the balance somewhere between 40 percent and 60 percent of what you owe,” Polisi wrote.

Another option that a consumer credit counseling agency can offer is a debt management plan, in which the firm negotiates to reduce interest rates. Unlike a debt settlement plan, debt management has the consumer eventually paying the entire amount they owe.

Finally, one of the other options offered by credit counseling includes setting up a plan for personal budgeting. There are a number of things people can do in order to trim the fat from a budget, including cutting down entertainment spending and buying generic goods.

A recent survey from the National Retail Federation indicates people may be less likely to take on credit card debt during this year’s holiday shopping season.

According to the poll, only 28.3 percent of respondents said they would pay for purchases with credit cards during this holiday season, which is a 10.1 percent drop from the 31.5 percent who said they would do so in last year’s survey.

“With many holiday shoppers focused on spending within their limits, it’s no surprise that fewer people will be relying on credit cards this year,” Tracy Mullin, president and CEO of the National Retail Federation, said.

Though credit card use is expected to fall, the survey showed that more people plan on relying on cash when it comes to making holiday purchases. Of respondents, 24.9 percent said they would purchase gifts with cash, which is a 9.1 percent increase from the 22.8 who said so last year.

When it comes to overall holiday shopping, a recent Burst Media survey shows that 62.8 percent of respondents said they plan on spending the same or less than they did last year. Furthermore, 85.3 percent of those polled plan on shopping online this year.