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Can you deal down debt?

Professional 'negotiators' may promise quick fixes. But the best counselors aim at roots of debt.

By Alan JochSpecial to The Christian Science Monitor / December 10, 2001

The holidays will be a little less stressful for one 22-year-old Rhode Island woman. In October, she was buried under $18,592 in outstanding debt with eight different credit cards, including one that charged 27.99 percent in annual interest.

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Counting missed payments and penalties, creditors were demanding $7,244 immediately, a daunting sum for someone just entering the workforce. So she turned to a credit counselor for help.

Consumer Credit Counseling Service of Southern New England put the woman on a strict budget. Then, with her blessing, the Providence, R.I.-based nonprofit agency did something more: It persuaded her creditors to reduce or eliminate interest charges. Without intervention, she would have owed $31,736 over five years. But now, this cash-strapped Rhode Islander will pay $24,623 over four years - saving her more than $7,000 if she keeps up the $523 monthly payments.

If the pre-holiday season drives consumers in droves to retailers, the post-holiday period will likely boost the number of consumers who will head to the offices of organizations like CCCSSNE.

Amid continuing layoffs and holiday-season spending pressures, credit counselors expect plenty of shoppers to use their credit cards in the coming weeks. The result: more Americans deeper in debt.

Even before the current economic downturn, consumer debt had been soaring. Credit-card debt more than doubled between 1994 and 2001, according to, a credit-card tracking network. It reports that although many made real inroads on debt in the summer of 2001, Americans carried an average credit-card balance of $8,488 per household at mid-year 2001 - or a staggering $602.9 billion owed to the major card issuers VISA, MasterCard, American Express, and Discover. By the end of 2000, credit-card delinquencies had hit 5.4 percent, according to the American Bankers Association, an industry trade group.

To handle this staggering debt load, consumers are increasingly seeking out credit counselors, whose debt reduction plans disperse portions of a monthly lump sum payment by consumers to each of his or her creditors. Counselors also negotiate with creditors to reduce a client's interest rates or to waive over-limit penalties and late charges. In addition, a counselor may get creditors to "re-age" an account, that is, to require immediate payment for only the current month, even if the borrower has missed previous installments. Creditor concessions can lower monthly payments and put more money toward principle than interest charges and penalties.

Fueled by a provision in proposed bankruptcy-reform legislation now before Congress that requires a credit counselor's aid, the counseling business is booming. A decade ago, only about 200 credit-counseling agencies existed in the US, according to Bill Cullinan, interim president and CEO of the National Foundation for Credit Counseling, a Silver Spring, Md., association that accredits agencies and certifies counselors. Today, that number has jumped to 800 agencies, including the 164 organizations affiliated with the NFCC.

But consumer-affairs experts say debt-ridden consumers are becoming vulnerable to deceptive or unscrupulous credit advisers, which often use flashy TV and Internet ads to solicit business. To meet state laws, credit counselors apply for nonprofit status in the eyes of the IRS, leaving unwary consumers to believe they're safe from paying exorbitant service fees.

Not so, according to Eric Friedman, investigative administrator for the Montgomery County Consumer Affairs Office in Rockville, Md. "Consumers hear 'nonprofit' and they think, 'the Red Cross. Here, take my blood,' " he says.

Nonprofit status also doesn't prevent some agencies from funneling millions of dollars in payment-processing fees and loans to for-profit affiliates. In addition to fees from consumers, most counselors also receive money from creditors, usually about 8 percent of the recovered debt. "Many consumers don't know credit counselors are getting money from Visa and MasterCard," Mr. Friedman says.

Consumer advocates also hear consumer complaints over how payments get distributed. Rather than doling out a consolidation program's first-month payments to creditors, some agencies pocket the money as a service fee. This puts an already late-paying consumer another month behind. Counselors may also hide requirements for "voluntary" contributions in the fine print of contracts, leaving consumers liable for added, unanticipated monthly expenses.