DEBT CONSULTANTS

A New Phenomenon of the Boom

THE rocketing increase in consumer credit has brought new life to an old business: debt counseling. Hundreds of consultants (also called poolers, liquidators, lumpers, managers, proraters) have sprung up around the nation and, in radio and newspaper ads, sing a soothing song: "Cheer up! No matter how much you owe or how many creditors you have--we will take over, arrange everything so that a single regular payment you can afford takes care of everything." Some imply that they will lend the debtor enough money to pay off his debts. But all the counselors do is collect money from the debtor, put him on a budget, try to get his creditors to agree to a repayment schedule, and use the debtor's money to pay off. For this service fees run from 10% to 50% of the total debt. After a survey of debt adjusters in 40 cities, the National Better Business Bureau reported that in 28, "Experience has been, on the whole, unfavorable." Actually, debt adjusting has usually been more of a racket than a service.

For example, Silver Shield System, Inc. opened its doors in New York 20 months ago, was soon handling $7,000,000 annually, had plans for expanding nationwide. Fortnight ago New York State Attorney General Jacob Javits capped a year of investigation by charging that Silver Shield had engaged in "false and misleading advertising," and "commingled" clients' money with its own. Far from balancing anyone else's budget, it could not even balance its own; it had a deficit of $100,000. As Javits moved for an injunction against the company for fraudulent practices, Silver Shield, a Delaware corporation, announced that it would "go out of business in New York," but will continue in other states. Same week, the New York and Georgia state legislatures approved bills to outlaw all proraters, thus following the lead of Massachusetts, Maine, and Pennsylvania. (Two more --Minnesota and Wisconsin--have tough regulatory laws.)

But in almost all other states prorating still booms along with little or no regulation. The commonest abuse is the consultant's practice of extracting the fee from the first payments, thus leaving the debtor still more in hock. For example, a New Yorker gave the budgeteer $35 a week for three weeks for payments on his $2,000 debt. He then discovered that $80 of the $105 had been diverted to the budgeteer, only $25 to creditors. There are other sharp practices. The Federal Grand Jury in Chicago last year indicted a debt-pool outfit which assessed customers a $75 "survey charge," then sent them next door to a loan company to borrow the $75. Another Chicago pooler would collect his fee, make a few payments, then recommend that his client go into bankruptcy, steering him to a fee-splitting lawyer. In Seattle a truck driver who got behind in his payments to the prorater found that the agency had changed hats. It began working as a collection agency for his creditors, and garnisheed his wages. Clients who wake up, discover that they've signed a skillfully-drawn, loophole-tight contract. One Philadelphian taken for $500 appealed to the local Legal Aid Society only to find 70 complainants before him. Nothing could be done. Said he: "It cost me $500 to find out I could handle my debts better than the debt lumpers could."

Yet not all of the outfits operating in the U.S. are rackets. Scientific debt management has a legitimate function; some people, otherwise capable and honest, seem incapable of handling their financial affairs and need an overseer. Such cases have been helped by the budgeteers. Financial Counsellors of San Francisco, approved by the local Better Business Bureau, has 2,000 clients, distributes 12,000 checks monthly to creditors, has paid out $8,000,000 in its ten years in business. It usually collects its fee only after other creditors have been satisfied. In Minnesota, where proraters are required to post a $5,000 surety bond and are criminally liable for any violation of the law, they have done a useful job.

Charles V. Neal Jr., whose Des Moines Credit Management Co. numbers among its 700 clients a bank vice president and a judge, has cases referred him by Catholic charities and labor unions. Price Patton, president of 25-year-old Financial Adjustment Co. of Chicago, proudly displays a letter from Libby, McNeill & Libby thanking him for clearing up an employee's debts and developing in him a sense of personal responsibility.

To clean up the industry, Patton and Neal have formed the American Association of Credit Counselors. But the standards are so high that they have signed up only 24 firms. They want stiff state laws to drive out "the promoters and racketeers, who have been such a thorn in our side." Explains Executive Secretary Neal: "Wherever regulatory state legislation has passed, the abuses have dried up."

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