Preventing Profit From Debt Help

Though its lax oversight of risky mortgage lending contributed to the housing and financial crises, the federal government has gotten at least one thing right. By stipulating that only nonprofit organizations may provide counseling for people who have filed for bankruptcy or who are considering reverse mortgages on their homes, it has established important protections for consumers.

Unfortunately, Maryland consumers who are struggling with debt and who have not filed for bankruptcy might soon lose similar protections if the for-profit debt management industry succeeds in changing state law.

Every year since the passage of the Maryland Debt Management Act in 2003, the for-profit debt management industry has come to Annapolis demanding a share of the market. And every year, consumer advocates have successfully defended the law that keeps the provision of debt management services limited to nonprofit organizations.

Consumers who cannot manage their debt sometimes turn to credit counselors for help in dealing with creditors, negotiating manageable payments and making those payments as regularly as possible, all with the goal of getting out of debt quickly. Often these entities simply provide credit counseling, but sometimes they negotiate repayment plans with creditors on a consumer's behalf. This service is called debt management. Nonprofit debt management firms typically receive a percentage of the monthly debt payments they process for their customers to cover operating costs.

The primary motive for properly run debt management firms is to help consumers get out of debt as quickly as possible. However, experience shows us that debt managers -- especially those seeking to make a profit -- can take advantage of consumers and worsen their financial problems, unless government provides strong oversight.

While for-profit debt management companies can help consumers with many elements of their financial problems, such corporations also exist to make money. That creates an incentive to prolong a consumer's debt repayment period.

For example, employees of for-profit debt management companies may try to sell additional and unnecessary products to their customers. In addition to paying their employees a salary, for-profit debt management companies frequently offer a commission to employees who sell additional debt management products. Indebted consumers are a vulnerable population with a history of making poor financial decisions. Often they will not be able to critically assess the value of these additional products being offered by someone they perceive as an ally.

Numerous nonprofit debt-management firms had their status revoked after Internal Revenue Service investigations over the past several years. Those probes were prompted in part by lawsuits filed against Germantown-based AmeriDebt that accused the now-defunct firm of misleading consumers by claiming it was nonprofit. The lawsuits said that AmeriDebt and its for-profit partners charged consumers $172 million in hidden fees despite promises to provide debt counseling without upfront fees. The company shut down its debt management operation in 2005 as part of a settlement with the Federal Trade Commission and other plaintiffs.

One might argue that because nonprofit debt management agencies have operated longer and ultimately provide better service, they would continue to provide most of the debt management help to Marylanders even if for-profit services were allowed to compete. However, for-profit and nonprofit debt management options cannot easily coexist.

For-profit debt managers have an inherent advantage in financial resources over their nonprofit counterparts. With bigger marketing budgets, for-profit debt management firms can afford to buy television and radio advertising when the greatest percentage of possible clients are viewing or listening. By contrast, nonprofit debt managers advertise primarily through public service announcements, which often are broadcast in the least-expensive time slots. The ability of for-profits to market in prime time will place negative pressures on the nonprofits that have honorably helped consumers. In the interest of protecting Maryland's most vulnerable consumers, lawmakers should put the proposal to allow for-profit debt management into the shredder -- where it belongs.

Johanna E. Neumann is state director of the Maryland Public Interest Research Group.