Personal Finance

When Christine C. moved to New York City, she had fairly solid credit history. She carried substantial credit-card debt -- about $17,000, mainly from charging college fees and books on credit cards over four years -- but always paid her minimums on time. She had purchased a car and paid off the loan in four years.

She landed a job earning about $40,000. She opened another credit card, and between the cost of living in Manhattan and her penchant for clothes and shoes, fell deeper into debt.

Then a friend suggested Christine consolidate her debts with a California firm called Debt Resolution Legal Centers.

She was assigned to a senior account manager. "He said, 'You have great credit so this shouldn't be a problem -- we'll consolidate everything,'" she recalls. "He had everything written out: What I would pay, and how much better it would be if I paid it this way. My whole motivation was to pay it off faster. I faxed them my information and contacted them every month." Christine sent the payments for her debt-management plan (DMP), plus a $50 monthly fee, electronically from her bank account.

Promising But Not Delivering

More than a year later, Debt Resolution assigned her a new point person, and shortly thereafter, another contact. Then, the firm cut off contact. Christine repeatedly called and e-mailed, to no avail. The company's Web site suddenly disappeared. She halted the bank transfers, and a short while later, started receiving letters from her creditors demanding she appear in court.

As Christine says, "That's when I knew I was screwed." Over roughly 18 months, Debt Resolution had never paid any of the creditors, pocketing both her payments and fees.

Paralyzed by fear and in deep denial, Christine she did nothing for three months. Fortunately, her boyfriend's father, an attorney, volunteered to help, filing suit against Debt Resolution and contacting her creditors.

The Federal Trade Commission has seen a rise in credit-counseling fraud, suing a half- dozen firms since 2003 for their practices. The offenses include for-profit companies that pose as non-profits, firms that charge thousands of dollars in undisclosed fees, companies that promise results they can't deliver, and firms that fail to pay creditors in a timely manner -- or not at all, according to Michelle Grajales, FTC staff attorney and credit counseling coordinator for its financial-practices division.

"Kicking People When They're Down and Out."

The FTC has also discovered "DMP mills," in which anyone who walks in the door is enrolled into a debt-management plan because the company receives additional compensation from creditors for doing so.

"There are people who don't need to be on a DMP -- in some cases, folks need to go right to bankruptcy because they have too much debt," says Grajales. "The firms charge someone thousands of dollars upfront and give no help -- and then later say, 'Well you should try bankruptcy.' In many cases that can be deceptive. These companies are kicking people when they're down and out."

The FTC recently brought cases against California credit-counseling firms Jubilee Financial, National Consumer Council, and Innovative Systems Technology (which did business as Briggs & Baker) and Debt Resolution Specialists (IST and DRS are controlled by the same group of individuals), according to Kenneth Abbe, staff attorney with the FTC's Western Region Los Angeles office (click on the above links to see the FTC documents). Thousands of consumers lost money with these companies.

"They all claimed to have special expertise that allowed them to step between the consumer and creditor and allowed the consumer to pay a reduced amount or lower interest rate," Abbe said. "The common factor was they were unable to do anything consumers couldn't do themselves. You can always call up a creditor and say, 'I'm having trouble paying, can we work this out?'"

Help for the Right Pick

Consumers seeking a legitimate credit counseling firm can start with the U.S. Trustee's office. The bankruptcy law that took effect last October requires consumers to participate in counseling and education. And the Trustee's office maintains a list of "approved" counselors by state. One quirk in the list -- it's organized by judicial district, so clicking on "New Jersey" returns some firms based in North Carolina.

The FTC offers the following tips on selecting a creditor counselor:

-Make sure the organization is licensed to do business in your state. Look for an organization that offers a range of services, including budget counseling and savings and debt-management classes.

-Counselors should be trained and certified in consumer credit, money and debt management, and budgeting. Look for a firm whose counselors are trained by an outside organization that's not affiliated with creditors.

-Counselors should spend at least an hour discussing your entire financial picture, helping you develop a personalized plan to solve your money problems now and avoid others in the future.

-Ask how the firm and its counselors are compensated, to avoid a DMP mill. If the organization won't disclose how the company or its staff are paid, get help elsewhere.

-Don't commit to a debt-management plan over the phone. Get everything in writing, and read all documents carefully before you sign them. Walk away if you feel pressured to sign on with a specific firm.

-If you do find an organization that's a good fit, check it out with your state Attorney General, local consumer protection agency, and Better Business Bureau to see if any complaints have been filed against the company.

-Get a detailed price quote in writing, and specifically ask whether all the fees are covered in the quote. Finally, since the firm is handling your most sensitive financial information, ask what it does to safeguard clients' privacy.

Protecting Your Credit Score

Once you start a debt-management plan, don't lose contact with your creditors. Make sure they know you are enrolled in a DMP and find out if they're receiving payments on time from your counseling firm.

"A lot of people don't do that because some of these counseling companies tell them not to contact their creditors," explains Grajales. "That would be a red flag."

If the firm fails to pay creditors, or pays late, the creditors may rescind the lower interest rates and fee waivers that come from being in a DMP. Falling behind on payments may also result in the accounts being "re-aged" again -- or reported as current to credit bureaus, even if you enroll in a new DMP with another firm. In short, your credit score is trashed.

To report a credit-counseling scam, contact your state Attorney General's office and the Federal Trade Commission at 877-FTC-HELP (or online at FTC.gov, click "For Consumers" and then "File a Complaint").

Christine never recovered a dime from Debt Resolution. She eventually found a legitimate credit-counseling firm to help her pay off her debts. Four years after she was scammed, she has whittled her credit-card debt down to about $8,500 and plans to pay it off in full before her 30th birthday.

But the experience destroyed her credit rating -- she needed a relative to co-sign her apartment lease. "I'm embarrassed that I was duped, I feel like a fool," she says, adding, "I'll never be in debt again in my life."