Federal regulators filed their first lawsuit against a credit counseling company Wednesday, charging that industry giant AmeriDebt used deceptive marketing to bilk hundreds of thousands of customers.
AmeriDebt touts itself as “the friend of consumers in crisis,” but the Federal Trade Commission alleged the company hid fees and did not educate people about how to get out of debt. The FTC, which filed the lawsuit in U.S. District Court in Greenbelt, Md., also claimed the company falsely described itself as nonprofit.
Regulators allege AmeriDebt made customers think that an initial fee would be part of their debt-reduction payments to creditors. Instead, it went to AmeriDebt.
“Consumers should not be tricked into doing business with a company that they think is working for them,” said Howard Beales, director of the FTC’s Bureau of Consumer Protection. “And they should not be induced to pay hundreds of dollars to AmeriDebt when they’ve been led to believe that their payment is going to their creditors.”
AmeriDebt attorney Zynda Sellers disputed the FTC’s characterization of the company. She said it does provide educational services to customers and that the payments cited by Beales are “voluntary contributions.”
With personal bankruptcies surging to record levels, there is a deep pool of customers for consumer counseling companies.
Complaints against such companies have grown significantly in recent years, according to Edward Johnson, president and chief executive of the Better Business Bureau-Washington D.C. In 1998, 237 complaints were filed nationwide. Last year, complaints grew to 1,480, with the largest percentage naming AmeriDebt.
Consumer groups hailed the FTC’s lawsuit.
“We applaud this action because there are entirely too many aggressive for-profit companies that are masquerading as charitable nonprofit credit counselors,” said Travis Plunkett, legislative director at the Consumer Federation of America. “AmeriDebt has become the symbol of bad credit counseling in this country, but they are by no means the only shady operators.”
In its complaint, the FTC charged that AmeriDebt marketed itself as nonprofit but actually works to make money for affiliated for-profit companies. The agency also said the company’s radio and television ads say AmeriDebt helps customers learn better financial management skills.
Instead, Beales said AmeriDebt simply enrolls all of its customers in so-called debt management plans, in which there are hidden up-front costs. The fees can average hundreds of dollars, a significant sum for people trying to get out of debt, Beales said.
Under the debt management plans, consumers make a single monthly payment to an agency for distribution to their creditors.
Germantown, Md.-based AmeriDebt says on its Web site that it has worked with 400,000 people and had more than 90,000 current clients as of July.
The FTC is asking the court to order AmeriDebt to stop deceiving consumers, and to reimburse anyone who has been duped by the company’s practices.
In addition to the FTC action, Minnesota’s attorney general sued AmeriDebt on Wednesday, accusing the company of defrauding customers. Texas was expected to follow suit. Illinois and Missouri filed separate lawsuits against AmeriDebt earlier this year.