Overwhelmed Credit-Counseling Charities Battle Their Own Debt

At Tabor Community Services here, so many people with big credit-card debts are seeking advice that first-time clients may wait as long as a month before they can meet with a counselor.

“What we are seeing now are people with medical issues or unemployment that turn to their credit cards to get by,” says Randi Shober, a senior credit counselor at the charity. “Once they reach their credit limits, everything just snowballs.”

Similar increases in demand for help are overwhelming nonprofit groups in other cities and towns. Requests for counseling have doubled this year at the dozens of charities that are members of the Association of Independent Consumer Credit Counseling Agencies, a Fairfax, Va., trade association.

The reason they face so much trouble meeting demand: Charities that offer advice on dealing with debt are facing a financial crisis of their own.

At Tabor, for example, the credit-counseling unit operated at a $36,000 deficit for the recently ended fiscal year.

Across the country, at Consumer Credit Counseling Service of San Francisco, Joanne Budde, the organization’s president, says the charity’s budget is “way below where we need to be” as demand for counseling rises by 50 percent. Ms. Budde, who has worked at credit-counseling groups for 19 years, says for the first time ever her group is seeing clients who are trying to pay their credit card bills before their mortgage.

“They’ve given up on the idea that they can save their house but they need their credit cards to buy food and gas,” she says. “Eventually it all just piles up.”

Little Sympathy

Banks and credit-card issuers that have traditionally supported counseling charities have curtailed their support, both to save money and to fall in line with recent Internal Revenue Service rules designed to curb abuses by counselors.

Other sources of support, such as private donations or government aid, are not easy to attract.

“It’s very hard to convince people to fund credit-counseling programs,” says Debbie Kidd, a counselor at Family Services, a charity in Charleston, S.C. “There’s not a lot of sympathy for people who had a wonderful time with their charge cards and it’s a very hard sell when it comes to seeking grants.”

Charging Fees

Though the reasons individuals turn to credit counseling are often more complex than just an ill-conceived buying binge, a recent survey by the Council on Foundations examining how grant makers had responded to the increased social-service needs sparked by the recession ranked “credit counseling” among the areas receiving the least interest and financial support.

To cope with the requests for more help, many credit-counseling charities have begun to charge fees for services and to conduct more counseling over the phone instead of through more-intensive face-to-face sessions.

Leaders of the groups say they fear that their inability to help everyone who needs it has made it easier for for-profit debt “relief” or “settlement” companies to blitz the airwaves and the Internet with financial schemes that can be risky for consumers, and in some cases, fraudulent.

“This is definitely a very challenging period,” says David Jones, president of the Association of Independent Consumer Credit Counseling Agencies. “Most agencies are operating at a loss. And the debt-settlement people — many of those are unscrupulously preying on consumers.”

‘Cry on a Daily Basis’

Charity officials who offer financial counseling say they have been able to expand their efforts to provide help to people who face the possibility of home foreclosure, but not to deal with credit-card issues.

“The federal government started to make some more money available for mortgage counseling as early as January ’08 and we have been able to expand our staff in that area,” says Robert Thomas, president of Tabor. “Getting funding for consumer credit counseling, however, is really tough.”

Ms. Kidd, of Family Services, says at her charity staff members “cry on a daily basis” over the loss of financial support for consumer credit counseling, which has dropped from “a couple hundred thousand” a few years ago to around $60,000 this year.

“We got a little bit of money from Chase this year and a little bit from Bank of America, but the consumer-counseling program used to bring in enough money to run this agency,” Ms. Kidd says.

The increased money the charity has received to help people with housing problems is largely supporting her charity today, she says.

‘Fair Share’ Cuts

Credit-counseling charities first emerged in the 1960s, and beyond simply educating consumers on matters of personal finance and prudent credit use, their principal aid for debt-swamped individuals is enrollment in a debt-management plan.

Counselors consolidate a client’s total unsecured-debt load and develop a monthly payment schedule based on household income. Creditors often waive late fees and reduce interest rates for people who choose to enter such plans.

For decades, credit counseling was supported almost exclusively by the creditors themselves, who returned to charities an average of 15 percent of the money collected through debt-management plans in “fair share” payments.

The late 1990s saw a large increase in consumer debt as credit-card circulation exploded. The number of nonprofit credit-counseling entities expanded as well, among them some disreputable groups that soon ran afoul of the IRS and the Federal Trade Commission, accused of exploiting their nonprofit status to reap millions from desperate consumers. (Notable among those was AmeriDebt, a now-defunct credit-counseling charity based in Germantown, Md., which in 2006 was forced to reimburse $35-million to its clients.)

While some creditors first began to reduce their “fair share” payments more than a decade ago, new IRS regulations in 2006 set limits on the amount of revenue a charity can earn via such payments. The limits are being phased in until 2011, when “fair share” payments can account for no more than half of a credit-counseling organization’s revenue. (The same regulations also limit the fees charities can charge for services and require that fees be waived for clients who cannot afford them.)

Deanne Loonin, a lawyer at the National Consumer Law Center, says that credit-counseling charities might fare better with grant makers and the federal government if they developed a broader range of tools to assist consumers and were able to keep more of them from declaring bankruptcy.

Debt-management plans have changed little over the years and the recession has proved how limiting they can be.

Mr. Jones, of the Association of Independent Consumer Credit Counseling Agencies, reports that about a quarter of all people counseled by his member charities qualified for debt-management plans before the recession.

But now, because of layoffs and larger debts, fewer than 8 percent do.

“We are seeing more people but helping fewer,” Mr. Jones says.

Perhaps some answers will emerge later this month, when the Philadelphia Federal Reserve hosts a conference titled “The Future of Consumer Credit Counseling.”

“It will be interesting as they take on these issues,” says Mr. Jones, who plans to attend. “I think there is still a need for nonprofit players.”

But, he says, the real answer may be to provide more financial education to young people. “If we can get the right kind of personal-finance education in the schools we might not have kids that graduate and don’t even know how to fill in a check ledger, let alone handle a credit card.”