Bankruptcy lite: Dark side of credit counseling - Part 2

Last year, Reilly's office cracked down on one Massachusetts credit counseling agency, Agawam-based Cambridge Credit Counseling Corp., which the attorney general claims had charged unfair fees and ran operations like a for-profit company. Reilly's lawsuit against Cambridge Credit is still pending.

Credit counselors, who legally must be nonprofit in Massachusetts, are supposed to help customers with debt management and other services. An agency typically negotiates with creditors for lower interest rate payments. Customers then hand funds over to counselors, who in turn pay off creditors.

But Barry-Smith said counselors sometimes charge upfront fees of $150 to $1,500, with monthly fees ranging from $30 to $50.

Often the fees are so high, said Barry-Smith, that they wipe out any savings customers may have gotten from lower interest rates negotiated by credit counselors.

Deanne Loonin, a staff attorney at Boston's National Consumer Law Center, said the new bankruptcy law sets no limits on fees, though the statute says they should be "reasonable.''
To make matters worse, someone who uses debt management - with payments negotiated and made through credit counselors - may see points knocked off their credit ratings for using a third party to help manage their finances.

A spokesman for Trans Union, one of the major credit-rating bureaus, acknowledged that debt management can sometimes harm consumer credit scores, depending on how it's reported to the agency by creditors.

He gave no other specifics.

However, a spokeswoman for Experian, another credit-rating firm, said her company does not view debt-management as a negative factor in credit scoring.

Nonetheless, the message a consumer sends to banks and other lenders when using debt management services is clear: I needed help to pay my bills.

Debt consolidation - in which people combine credit-card debts into one new loan account, usually at lower interest rates - may also knock a few points off of someone's rating. The theory is that people have taken out a new loan - and therefore it's a new risk.