Debt management bill riles agencies
The state Senate Banking and Insurance Committee is to vote today on a controversial bill that would open up the consumer debt management field in Pennsylvania to for-profit companies.
Nonprofits such as South Side-based Advantage Credit Counseling Service are vigorously battling the measure and a similar House bill that would allow corporations such as CareOne Services Inc. of Columbia, Md., to sell debt “pooling” services to consumers frazzled over high credit card billls and, the agencies say, vulnerable to making poor choices.
“Why the urgency now?” Advantage CEO Steven J. Piotrowski asked, referring to the bills, although he pointed to the Internal Revenue Service’s ongoing audits of debt managers nationwide as one likely reason.
Spurred by consumers’ complaints that AmeriDebt Inc. and other debt counselors charged high fees but did little to resolve their credit problems, the IRS has been reviewing the 501(c)(3) non-profit status of hundreds of agencies.
Up to half could lose their status, and because Pennsylvania and some other states limit the debt management business to nonprofits, some worry there will be a void for consumers who need the service.
But many nonprofits have come through the IRS scrutiny, Piotrowski said, adding, “We could fill that capacity, and it wouldn’t take us long. We don’t need to open it up to the for-profits.”
Advantage provided credit counseling to 35,621consumers last year, and 3,355 of them were in debt management plans — making one monthly payment to the agency, which then paid installments to creditors. Clients who stick with such programs typically pay off debts in three to five years.
California, Hawaii and Massachusetts are considering opening up debt management to for-profits, said Clarky Davis, spokeswoman for CareOne, and 35 states allow them.
The main thrust of the Pennsylvania legislation, though, is to regulate fees and other aspects of debt management for the first time, Davis said. “They have not changed the rules in 70 years,” she said, and because consumers’ needs have changed, more choices should be available.
“So many consumers are so entrenched in debt, and they are looking for a way to pay it off with the least pain. If they need debt management, that’s fine,” but if not, CareOne has bankruptcy, settlement and other services.
State Rep. Dwight Evans, D-Philadelphia, introduced House Bill 2294, subject of a House Commerce Committee hearing last month in Pittsburgh. State Sen. Patrick Browne, R-Allentown, introduced the similar Senate Bill 1276.
“We didn’t expect this to inflame such passion,” said Johnna Pro, Evans’ spokeswoman. “Clearly the financial services are out there, and with the mortgage and credit crises, more people will be availing themselves of them.”
The old law may be antiquated, considering dramatic changes in the banking industry, Pro said. Today, “The lines are blurred in terms of nonprofits and for-profits, and with the Internet, in terms of physical location. Is it better to provide some sort of oversight, or just to leave the issue to chance?”
The crucial issue for consumers, the nonprofits say, is that IRS standards require them to provide individualized credit counseling and financial education.
Advantage, founded 40 years ago, scrutinizes clients’ finances, down to the what they spend on lottery tickets every week, and recommends a plan that may or may not involve debt management — and could extend to mortgage or student loan counseling. “We assess the whole picture, not just the credit cards,” said Mary Loftus, vice president of agency services and education.
For-profits with multiple divisions, though, might sell debt management plans without sufficient counseling and education, then, if the client fails to complete them, enroll them in a debt settlement plan, Loftus said. Clients often pay high up-front fees for such plans, in which the provider negotiates with creditors to take a fraction of what’s owed.
But creditors often don’t accept a settlement until the debt is charged off, or deemed uncollectable, and by then, “there could be severe damage to the credit report,” Loftus said. Advantage doesn’t offer debt settlement.
At CareOne, New clients talk to a “solutions coach” who looks at their debts and other financial issues. Education is provided through a financial guide book, online resources and message boards and later, outreach appointment calls, CareOne’s Davis said.