updated 3/24/2004 12:13:01 PM ET 2004-03-24T17:13:01

Weighed down by $90,000 in credit-card and bank debt, retired museum director Raymond Schuck heard an ad on the radio and called Cambridge Credit Counseling. He said he was promised lower interest rates and was asked to make a monthly payment of $1,946 — but the money didn’t make it to his creditors.

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“My credit rating was completely ruined because of late payments” and he eventually filed for bankruptcy, Schuck told a Senate hearing Wednesday.

Senate investigators have found consumers drowning in credit-card debt increasingly are being victimized by poor service, hidden charges and high fees charged by some credit counseling agencies that often leave them even deeper in debt.

Former employees of Cambridge Credit and AmeriDebt Inc., also testifying Wednesday, told of having to use fake names, “sweatshop” sales operations and pressure on commission-paid counselors to get consumers to pay stiff upfront fees, with no counseling or debt education provided.

Officials of the two companies disputed the accounts of the former customers and employees.

Chris Viale, chief operating officer of Cambridge Credit, called them “unfair and distorted accusations.”

“There is a popular notion that performance incentives encourage counselors to act in their own best interests rather than in the interests of consumers. This is not true,” Viale said.

Consumer complaints are on the rise as new companies come into the counseling business and abuses proliferate, according to a report released by the bipartisan investigative panel of the Senate Governmental Affairs Committee. The investigators found a pattern of abuse among some counseling agencies, especially new entrants to the field.

“Clearly, something is wrong with the credit counseling industry,” said Sen. Norm Coleman, R-Minn., chairman of the investigative subcommittee. “Our investigation has revealed common patterns of improper conduct” by new entrants.

With personal bankruptcies surging to record levels in this country, there is a deep pool of customers for credit counseling companies — often the last stop before a bankruptcy filing. Credit counselors historically have been financed by banks that issue credit cards but those contributions have been declining, forcing counselling agencies to charge fees.

AmeriDebt has been sued by the Federal Trade Commission, five states and consumers.

The FTC alleged that the company used deceptive marketing to bilk hundreds of thousands of customers and failed to educate people about how to get out of debt. The regulators also alleged that the Germantown, Md.-based company made customers believe that an initial fee would be part of their debt-reduction payments to creditors — but it instead went to AmeriDebt.

The company has disputed regulators’ allegations. It says it offers customers educational services, and that the debt-reduction payments are “voluntary contributions.”

The Senate subcommittee report said the investigation “has revealed that AmeriDebt is not the only potential ’bad actor’ in the industry. Indeed, many of AmeriDebt’s practices represent a pattern of abuse among several new entrants in the credit counseling industry.”

The counseling agencies say they act responsibly and provide a valuable service to consumers.

Credit counseling works by putting consumers who cannot afford to make all their payments into debt management programs that allow them to consolidate their debts from several credit cards, reduce their monthly payments and lower their interest rates. Consumers agree to destroy their credit cards, not take out new credit and make a monthly payment to the counseling agency, which distributes it to creditors.

But new entrants — rather than relying on contributions to nonprofit counseling agencies from credit card companies or small fees paid by consumers — use a different structure. They have nonprofit agencies that generate “massive revenues” paid by consumers for a for-profit affiliate for advertising, marketing and executives’ salaries, according to the report.

The Internal Revenue Service has said that some nonprofit credit counselors do not meet the standards for educational, tax-exempt status. The IRS recently began auditing 50 credit counseling agencies and has a new program for reviewing the agencies’ applications for nonprofit status.Consumers drowning in credit-card debt increasingly are being victimized by poor service, hidden charges and high fees charged by some credit counseling agencies that often leave them even deeper in debt, Senate investigators have found.

Consumer complaints are on the rise as new companies come into the counseling business and abuses proliferate, according to a report released Wednesday by the bipartisan investigative panel of the Senate Governmental Affairs Committee. The investigators found a pattern of abuse among some counseling agencies, especially new entrants to the field.

"Clearly, something is wrong with the credit counseling industry," the report concludes.

With personal bankruptcies surging to record levels in this country, there is a deep pool of customers for credit counseling companies — often the last stop before a bankruptcy filing. Credit counselors historically have been financed by banks that issue credit cards but those contributions have been declining, forcing credit agencies to charge fees.

People described as victims and former employees of some credit counseling agencies were testifying at a hearing Wednesday by the investigative subcommittee, and officials of several agencies were defending their practices.

One of the agencies is industry giant AmeriDebt Inc., which has been sued by the Federal Trade Commission and five states, plus consumers.

The FTC alleged that the company used deceptive marketing to bilk hundreds of thousands of customers and failed to educate people about how to get out of debt. The regulators also alleged that the Germantown, Md.-based company made customers believe that an initial fee would be part of their debt-reduction payments to creditors — but it instead went to AmeriDebt.

The company has disputed regulators' allegations. It says it offers customers educational services, and that the debt-reduction payments are "voluntary contributions."

The Senate subcommittee report said the investigation "has revealed that AmeriDebt is not the only potential 'bad actor' in the industry. Indeed, many of AmeriDebt's practices represent a pattern of abuse among several new entrants in the credit counseling industry."

The counseling agencies say they act responsibly and provide a valuable service to consumers.

Credit counseling works by putting consumers who cannot afford to make all their payments into debt management programs that allow them to consolidate their debts from several credit cards, reduce their monthly payments and lower their interest rates. Consumers agree to destroy their credit cards, not take out new credit and make a monthly payment to the counseling agency, which distributes it to creditors.

But new entrants — rather than relying on contributions to nonprofit counseling agencies from credit card companies or small fees paid by consumers — use a different structure. They have nonprofit agencies that generate "massive revenues" paid by consumers for a for-profit affiliate for advertising, marketing and executives' salaries, according to the report.

The Internal Revenue Service has said that some nonprofit credit counselors do not meet the standards for educational, tax-exempt status. The IRS recently began auditing 50 credit counseling agencies and has a new program for reviewing the agencies' applications for nonprofit status.

Copyright 2004 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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