S. Hrg. 108–545

PROFITEERING IN A NON-PROFIT INDUSTRY:

ABUSIVE PRACTICES IN CREDIT COUNSELING

HEARING

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

OF THE

COMMITTEE ON 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

MARCH 24, 2004

Printed for the use of the Committee on Governmental Affairs

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PROFITEERING IN A NON-PROFIT INDUSTRY: ABUSIVE PRACTICES

IN CREDIT COUNSELING

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S. Hrg. 108–545

PROFITEERING IN A NON-PROFIT INDUSTRY:

ABUSIVE PRACTICES IN CREDIT COUNSELING

HEARING

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

OF THE

COMMITTEE ON 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

MARCH 24, 2004

Printed for the use of the Committee on Governmental Affairs

(

(II)

COMMITTEE ON GOVERNMENTAL AFFAIRS 

SUSAN M. COLLINS, Maine, Chairman 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

NORM COLEMAN, Minnesota 

ARLEN SPECTER, Pennsylvania 

ROBERT F. BENNETT, Utah 

PETER G. FITZGERALD, Illinois 

JOHN E. SUNUNU, New Hampshire 

RICHARD C. SHELBY, Alabama 

JOSEPH I. LIEBERMAN, Connecticut 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

RICHARD J. DURBIN, Illinois 

THOMAS R. CARPER, Delaware 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas

MICHAEL D. BOPP, Staff Director and Chief Counsel 

JOYCE A. RECHTSCHAFFEN, Minority Staff Director and Counsel 

AMY B. NEWHOUSE, Chief Clerk

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

NORM COLEMAN, Minnesota, Chairman 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

ARLEN SPECTER, Pennsylvania 

ROBERT F. BENNETT, Utah 

PETER G. FITZGERALD, Illinois 

JOHN E. SUNUNU, New Hampshire 

RICHARD C. SHELBY, Alabama 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

RICHARD J. DURBIN, Illinois 

THOMAS R. CARPER, Delaware 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas

RAYMOND V. SHEPHERD, III, Staff Director and Chief Counsel 

STEVEN GROVES, Counsel 

KATHERINE ENGLISH, Counsel 

ELISE J. BEAN, Minority Staff Director and Chief Counsel 

MARY D. ROBERTSON, Chief Clerk 

(III)

C O N T E N T S 

Opening statements: Page 

Senator Coleman .............................................................................................. 1

Senator Levin .................................................................................................... 7

Senator Akaka .................................................................................................. 9

Senator Dayton ................................................................................................. 11

Senator Pryor .................................................................................................... 29

Prepared statements: 

Senator Durbin ................................................................................................. 85

Senator Lautenberg .......................................................................................... 87

WITNESSES 

WEDNESDAY, MARCH 24, 2004

Raymond Schuck, Victim, Cambridge Credit Counseling Corp., Lima, Ohio ..... 12

John Pohlman, Former Employee, Cambridge Credit Counseling Corp., East 

Granby, Connecticut ............................................................................................ 14

Jolanta Troy, Victim, AmeriDebt, Inc., Carlisle, Pennsylvania ........................... 16

Johnpaul Allen, Former Employee, AmeriDebt, Inc., New Market, Maryland .. 17

Chris Viale, General Manager, Cambridge Credit Counseling Corp., Agawam, 

Massachusetts ...................................................................................................... 32

Matthew Case, Chief Operating Officer, AmeriDebt, Inc., Germantown, Maryland ........................................................................................................................ 34

Cuba M. Craig, Chief Executive Officer, American Financial Solutions, Seattle, Washington ................................................................................................. 35

James Kroening, Director, FamilyMeans Consumer Credit Counseling Service, Stillwater, Minnesota .................................................................................... 37

Andris Pukke, President, DebtWorks, Inc., Germantown, Maryland, accompanied by John Williams ..................................................................................... 62

Michael Malesardi, Chief Financial Officer, The Ballenger Group, LLC, Frederick, Maryland .................................................................................................... 63

Bernaldo Dancel, Chief Executive Officer, Amerix Corporation, Columbia, 

Maryland ............................................................................................................... 65

Mark W. Everson, Commissioner, Internal Revenue Service .............................. 78

Thomas B. Leary, Commissioner, Federal Trade Commission ............................ 80

ALPHABETICAL LIST OF WITNESSES

Allen, Johnpaul: 

Testimony .......................................................................................................... 17

Prepared statement .......................................................................................... 95

Case, Matthew: 

Testimony .......................................................................................................... 34

Prepared statement .......................................................................................... 127

Craig, Cuba M.: 

Testimony .......................................................................................................... 35

Prepared statement .......................................................................................... 142

Dancel, Bernaldo: 

Testimony .......................................................................................................... 65

Prepared statement .......................................................................................... 175

Everson, Mark W.: 

Testimony .......................................................................................................... 78

Prepared statement with attachments ........................................................... 181

Kroening, James: 

Testimony .......................................................................................................... 37

Prepared statement .......................................................................................... 150

Page

IV

Leary, Thomas B.: 

Testimony .......................................................................................................... 80

Prepared statement .......................................................................................... 193

Malesardi, Michael 

Testimony .......................................................................................................... 63

Prepared statement with attachments ........................................................... 153

Pohlman, John: 

Testimony .......................................................................................................... 14

Prepared statement .......................................................................................... 91

Pukke, Andris: 

Testimony .......................................................................................................... 62

Schuck, Raymond: 

Testimony .......................................................................................................... 12

Prepared statement .......................................................................................... 89

Troy, Jolanta: 

Testimony .......................................................................................................... 16

Prepared statement .......................................................................................... 93

Viale, Chris: 

Testimony .......................................................................................................... 32

Prepared statement .......................................................................................... 97

Supplemental written submission with attachments .................................... 102

APPENDIX 

Staff Report entitled ‘‘Profiteering in a Non-Profit Industry: Abusive Practices 

in Credit Counseling’’ ........................................................................................... 203

EXHIBITS 

1. Corporate Chart of Cambridge-Brighton ........................................................ 240

2. Corporate Chart of DebtWorks-Ballenger Group ........................................... 241

3. Corporate Chart of Ascend One-Amerix ......................................................... 242

4. Service Agreement between Raymond Schuck and Cambridge Credit 

Counseling Corp., dated June 29, 2001 .......................................................... 243

5. $1,946 check sent by Raymond Schuck to Cambridge Credit Counseling 

Corp. for enrollment in his debt management plan, dated July 13, 2001 ... 248

6. Client Financial Disclosure of Raymond Schuck, dated October 12, 2001 .. 249

7. Correspondence between AmeriDebt and Better Business Bureau, dated 

December 26, 2002, regarding Jolanta Troy’s enrollment in debt management plan .......................................................................................................... 250

8. AmeriDebt Debt Management Plan Agreement, page 5 ................................. 251

9. Flow Chart prepared by AmerDebt for employee training ........................... 252

10. Debt Relief Clearinghouse solicitation letter .................................................. 254

11. AmeriDebt document outlining procedure for forwarding leads for home 

equity loans to Fidelity & Trust Mortgage, Inc. and outlining compensation received by AmeriDebt counselors for such lead .................................... 255

12. Get Excited employee training document prepared by AmeriDebt ............... 258

13. Tip Sheet on telephone sales skills for AmeriDebt employee training ........ 259

14. Portion of AmeriDebt script pertaining to ‘‘voluntary’’ contribution ............ 260

15. AmeriDebt September 2001 Company Notes .................................................. 261

16. How Do You Respond When Explaining Questions Regarding The Contribution, prepared by DebtWorks ................................................................... 262

17. Was The Client Forced To Sign The Agreement?, prepared by DebtWorks . 263

18. Deposition of John Puccio conducted by the Permanent Subcommittee 

on Investigations, July 1, 2004 ........................................................................ 264

19. Statement for the Record of Preston O. Duppins, Jr., President and 

Chief Executive Officer, Genesis Financial Management, Inc ...................... 322

20. Statement for the Record of David C. Jones, President, Association of 

Independent Consumer Credit Counseling Agencies ..................................... 327

Page

V

21. Responses to suplemental questions for the record submitted by Senator 

Frank Lautenberg to:

a. The Honorable Mark W. Everson, Commissioner, Internal Revenue 

Service ....................................................................................................... 338

b. The Honorable Thomas B. Leary, Commissioner, Federal Trade 

Commission .............................................................................................. 339

c. Chris Viale, General Manager, Cambridge Credit Counseling Corp ... 341

d. James Kroening, Director, FamilyMeans Consumer Credit Counseling Service ........................................................................................... 343

e. John Pohlman, Former Employee, Cambridge Credit Counseling 

Corp ........................................................................................................... 344

f. Raymond Schuck, Victim, Cambridge Credit Counseling Corp ............ 345

(1)

PROFITEERING IN A NON-PROFIT INDUSTRY: 

ABUSIVE PRACTICES IN CREDIT COUNSELING 

WEDNESDAY, MARCH 24, 2004

U.S. SENATE, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS, OF THE COMMITTEE ON GOVERNMENTAL AFFAIRS, Washington, DC. 

The Subcommittee met, pursuant to notice, at 9:04 a.m., in room 

342, Dirksen Senate Office Building, Hon. Norm Coleman, Chairman of the Subcommittee, presiding. 

Present: Senators Coleman, Levin, Akaka, Dayton, and Pryor. 

Staff Present: Raymond V. Shepherd, III, Staff Director; Joseph 

V. Kennedy, General Counsel; Steven Groves, Counsel; Katherine 

English, Counsel; Leland Erickson, Counsel; Mark Greenblatt, 

Counsel; Jay Jennings, Investigator; Mary D. Robertson, Chief 

Clerk; Kristin Meyer, Staff Assistant; Katherine Russell, Detailee, 

FBI; Bill Winne, Professional Staff; Andrew Plehal, Intern; Elise J. 

Bean, Democratic Staff Director/Chief Counsel; Laura Stuber, 

Counsel to the Minority; Marianne Upton (Senator Durbin); Tate 

Heuer and Gita Uppal (Senator Pryor); Joyce Nicolas (Senator 

Akaka). 

OPENING STATEMENT OF SENATOR COLEMAN 

Senator COLEMAN. This hearing of the Permanent Subcommittee 

on Investigations is called to order. Good morning and welcome to 

today’s hearing. We are holding this hearing to address the continuing ongoing problems with the credit counseling industry. 

Consumer debt has more than doubled in the past 10 years. The Nation’s credit card debt current tops $735 billion, or an average 

of nearly $7,000 per household. Since 1996, more than one million 

consumers have filed for personal bankruptcy each year and a 

record 1.7 million new filings in 2003. 

Since the 1960’s, consumers with credit card debt regularly 

turned to their local non-profit credit counseling agency for advice 

and financial education. Consumers were given face-to-face counseling sessions with trained counselors. Credit counselors conducted a detailed budget analysis with a consumer, analyzed their 

spending habits, determined why the consumer was in debt, and 

educated the consumer in how to avoid falling back into debt. 

One such agency, FamilyMeans Consumer Credit Counseling 

Service, will testify about how the industry has run successfully for 

all these years. Even today, FamilyMeans provides an in-depth 

analysis of each consumer who comes to them for help, gives them 

proper counseling and education, and only when the consumer 

2

needs intercession with their creditors enrolls them in a debt management plan. They provide these services free of charge or at 

minimal expense to the consumer. 

FamilyMeans is by no means the only credit counseling agency 

that takes a comprehensive and holistic approach to each consumer 

they provide services to. The agencies organized under the National 

Foundation for Credit Counseling and the Association of Independent Consumer Credit Counseling Agencies require their members to adhere to strict standards of practice and restrict the cost 

that customers may be required to cover. Those associations prove 

that self-regulation can be an effective means of keeping this industry consumer-friendly. 

Under traditional social service models, consumers who could not 

afford to make all their monthly credit card payments often enrolled in a debt management plan, or DMP for short, which allowed 

them to consolidate their debts from several credit cards, reduce 

their monthly payments, and lower their interest rates. The traditional credit counseling agencies provided counseling, education, 

and debt management plans free of charge or for minimal contributions. To cover operational costs, creditor banks paid credit counseling agencies a percentage of the money that was collected from 

consumers through debt management plans. The credit counseling 

industry successfully operated in this manner for several decades. 

Over the past several years, however, the credit counseling agency has undergone significant changes. New and aggressive credit 

counseling agencies have changed the manner in which consumers 

are treated. These changes have resulted in consumer complaints 

about excessive fees, pressure tactics, nonexistent counseling and 

education, promised results that never come about, ruined credit 

ratings, poor service, in many cases being left in worse debt than 

before they initiated their debt management plan. 

We will hear testimony today from two insiders who worked for 

two of the Nation’s largest non-profit credit counseling agencies. 

They describe the organizations at these non-profits as telemarketing sweatshops designed to take advantage of thousands of 

people in bad financial positions. One of the insiders describes this 

scene as ‘‘it was a boiler room mentality. There was a large board 

at the front of the room that reminded me of the leader board at 

a golf tournament. It had the names of counselors who had the top 

sales for the month in red and yellow lights.’’ Make no mistake, 

these credit counseling agencies were designed to sell a product, 

the debt management plan, not primarily to deliver a service of 

education and counseling. 

The Federal Trade Commission and the Attorney Generals of Illinois, Maryland, Minnesota, Missouri, and Texas have taken action 

against AmeriDebt, DebtWorks, and their related partners. The Internal Revenue Service has initiated audits of over 50 credit counseling agencies. Several class action lawsuits are currently pending 

against several of the new entrants. 

Clearly, something is wrong with the credit counseling industry. 

So what has gone wrong and what has happened? It would seem 

that money is the root cause of these problems. Many of these new 

entrants in the credit counseling industry have developed a busiVerDate 0ct 09 2002 13:25 Aug 17, 2004 Jkt 093477 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 C:\DOCS\93477.TXT SAFFAIRS PsN: PHOGAN
3

ness model which is based on generating revenue rather than providing counseling to indebted consumers. 

This new for-profit model is designed so that credit counseling 

agencies generate massive revenues to fund advertising, marketing, executive salaries, and any number of other activities beyond actual credit counseling. The new model looks to the consumer to provide these revenues. 

When profit motive is injected into a non-profit industry, it 

should come as no surprise that harm to the consumers will follow. 

Indeed, the primary effect of the for-profit model has been to corrupt the original purpose of the credit counseling industry, which 

was to provide advice, counseling, and education to indebted consumers free of charge or at minimal charge and place consumers 

on debt management plans only if they are otherwise unable to pay 

their debts. 

Some of the new entrants now reverse the practice. They provide 

no bona fide education and counseling and place every possible consumer into a debt management plan charging unreasonable or even 

exorbitant fees. 

For the past several months, Subcommittee staff has conducted 

interviews of individuals, agencies, and for-profit corporations to 

play a role in the credit counseling industry, including credit counseling agencies, major creditor banks, State and Federal officials, 

and consumer advocates. Thousands of documents were reviewed. 

Over 500 consumer complaints were examined and we spoke with 

over 50 consumers about their experiences with several different 

credit counseling agencies. We have also spoken to over 40 current 

and former employees of credit counseling agencies in order to see 

how these agencies operate from the inside. 

Today’s hearing presents the results of our investigation. As I 

stated earlier, it would seem that money is at the root of the problems currently facing the credit counseling industry. The affiliation 

between non-profit credit counseling agencies and for-profit businesses is at the core of that problem. A review of the tax returns 

for both the non-profit and for-profit entities reveals that the vast 

majority of the fees and contributions made to the credit counseling 

agency are siphoned off by the for-profit partners. 

Our hearing today focuses on three particular credit counseling 

conglomerates, and I say conglomerates because these new entrants often consist of a complex network of interrelated companies 

who are organized and operated for a common purpose, to generate 

revenue by charging fees to consumers for enrolling in debt management plans. The business practice of these new entrants constitute a potential abuse of the 501(c)(3) tax-exempt status granted 

to the credit counseling agencies by the IRS. The misrepresentations made by these agencies to consumers regarding fees and what 

education will be provided may likely violate the Federal Trade 

Commission Act. 

Our investigation has revealed the common patterns of improper 

conduct by the new entrants. Each new entrant has been established and organized for the specific purpose of generating profits 

for one or more insider beneficiaries. The insiders of the new entrants have engaged in questionable transactions for the purposes 

of turning the non-profit agency into a profit-generating business. 

4

The new entrants, through their affiliated agencies, have generated massive revenue for themselves by charging excessive fees 

for initiating and managing a debt management plan and/or siphoning off such fees to related for-profit companies. Multiple nonprofit counseling agencies have been organized by the insiders to 

provide multiple streams of revenue for the for-profit back-office 

processing companies. 

Regardless of what business model is used, debtors received little 

or no actual credit counseling or education as was contemplated by 

granting them tax-exempt status. Employees are routinely given 

bonuses based on their ability to enroll debtors in debt management plans, evidencing an intent to generate revenue rather than 

to provide relevant counseling and education. 

The new entrants that we have investigated engage in most, if 

not all, of these practices. One of the conglomerates we have invited to testify today is the Cambridge-Brighton family of companies. Cambridge-Brighton consists of three credit counseling agencies and three for-profit affiliates. Cambridge-Brighton is owned 

and operated by two brothers, John and Richard Puccio, who control each of the five entities in the conglomerate. All revenues for 

this family of companies come directly from the consumers. The 

vast majority of revenue that comes into the three credit counseling 

agencies from consumers is channeled to the three for-profit affiliates. 

At the top of the pyramid is the for-profit Brighton Credit Corporation of Massachusetts, now known as Brighton Debt Management Services, which does the account processing for the debt management plans generated by the three credit counseling agencies. 

Since 1998, this entity realized gross revenues in excess of $40 million. 

Debt Relief Clearinghouse is the for-profit company that produces infomercials, promotional videos, and other marketing materials for the conglomerate. Between 2000 and 2002, Debt Relief 

Clearinghouse has been paid in excess of $25 million. 

A third for-profit company, Cypress Advertising and Promotions, 

serves as an advertising broker and has been paid over $6.5 million 

since 1999. 

In total, the Cambridge-Brighton for-profit companies boasts over 

$71 million during that time period, all as a result of consumers 

being enrolled in debt management plans. 

From where did all this money originate? It comes from consumers who look to Cambridge for assistance with their debts. 

Where some credit counseling agencies charge $25 or no fee at all 

to set up a debt management plan, the Cambridge-Brighton agencies charge a full month’s payment as an up-front fee. Raymond 

Schuck will testify as to how he was charged close to $2,000 just 

to enroll in a debt management program. That fee did not go to Mr. 

Schuck’s creditors. It went into Cambridge’s coffers. Mr. Schuck’s 

counseling and education consisted of two phone calls lasting a 

total of 20 minutes. Unfortunately for Mr. Schuck, the Cambridge 

debt management plan left him in worse financial condition than 

when he started and he ultimately declared bankruptcy. 

The second conglomerate that is testifying today consists of 

AmeriDebt and its for-profit affiliate, DebtWorks, now known as 

5

The Ballenger Group. The credit counseling agency known as 

AmeriDebt was operated for several years by Pamela Pukke as a 

stand-alone entity enrolling consumers in DMPs and doing all the 

necessary processing for the accounts. Then in 1999, AmeriDebt decided to simply split itself into two companies, one non-profit to enroll customers onto DMPs and one for-profit company to perform 

the DMP processing function. The new for-profit was called 

DebtWorks and was wholly owned and controlled by Pamela 

Pukke’s husband, Andris Pukke. 

Employees who had been trained at AmeriDebt fanned out to 

form additional credit counseling agencies which provide additional 

streams of revenue for DebtWorks. DebtWorks and Mr. Pukke assisted in the formation and organization of new credit counseling 

agencies with start-up loans and legal assistance. In return, these 

new agencies also contracted with DebtWorks for DMP processing 

and referred consumers to Mr. Pukke’s other for-profit entities, Infinity Resources Group, Fidelity and Trust Mortgage, and F&M 

Mortgage. 

The non-profit credit counseling industry was very profitable for 

DebtWorks. Between 1999 and 2002, DebtWorks grossed in excess 

of $108 million. Again, it was the consumer who paid all the 

money. 

AmeriDebt’s price for enrolling in a debt management plan is 3 percent of the consumer’s total debt, so if the consumer is $25,000 

in debt, the price of their plan with AmeriDebt would be $750. 

Jolanta Troy will testify today about how she thought her first payment to AmeriDebt of $783 was going to be sent to her creditors, 

only to find out that AmeriDebt actually kept the money. She had 

specifically told AmeriDebt she could not afford to make the large 

up-front contribution. Mrs. Troy wrote to AmeriDebt asking for the 

money to be returned, but AmeriDebt flatly refused. Mrs. Troy received no actual counseling and education. She was simply enrolled 

in a debt management plan and left to her own devices. Like Mr. 

Schuck, Mrs. Troy was left worse off by her debt management plan 

than she was before and had to declare bankruptcy. 

The final conglomerate we have invited to testify today is the Ascend One conglomerate. The Ascend One conglomerate began like 

AmeriDebt, as a single credit counseling agency called Genus Credit Management. It was operated by Bernaldo Dancel. Like 

AmeriDebt, Mr. Dancel simply split his agency into two parts, 

naming his new for-profit company Amerix Corporation. Amerix 

then set out across the country in an effort to form additional credit counseling agencies. Amerix assisted in the formation of five 

credit counseling agencies, all of which currently contract with 

Amerix for DMP processing services. 

As with the prior two conglomerates, the Ascend One-Amerix 

group of companies is funded by consumer fees and contributions. 

The credit counseling agencies in this conglomerate are contractually obligated to remit between 50 and 85 percent of all their revenue to Amerix. In all, between 1998 and 2002, Amerix received 

gross revenues in excess of $386 million, all generated by the debt 

management plans. Other revenues realized by Ascend One come 

from consumers who were referred by the affiliated credit counseling agencies to its wholly-owned for-profit subsidiaries, FreeVerDate 0ct 09 2002 13:25 Aug 17, 2004 Jkt 093477 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 C:\DOCS\93477.TXT SAFFAIRS PsN: PHOGAN
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domPoint Corporation and FreedomPoint Financial. These companies market mortgage broker services and other projects to highly 

leverage consumers. 

Consumers who contact credit agencies affiliated with the Ascend 

One receive little counseling or education. In fact, consumers were 

permitted to enroll in a debt management plan entirely over the 

Internet without having spoken to a credit counselor. This practice 

apparently removes the expense associated with the counselor actually spending time to give advice and education to consumers. 

We will also hear testimony today from the Federal agencies responsible for regulating and enforcing the laws in this area, the Internal Revenue Service and the Federal Trade Commission. Each 

of these agencies have taken modest steps to enforce the tax code 

and consumer protection laws within this industry. I am heartened 

to hear that Commissioner Everson has initiated over 50 audits of 

credit counseling agencies. However, where consumers are being 

victimized by supposed non-profit agencies they trust to help get 

them out of debt, it is incumbent upon the Federal Government to 

do more. 

I look forward to hearing from our panelists this morning and I 

know we will all learn a great deal. I am committed to discovering 

the causes of the problem plaguing this once consumer-friendly industry. I am equally committed to finding solutions either by additional enforcement or legislation to remedy these problems. 

That was a rather lengthy statement, but due to the complexity 

of what we are looking at today, I thought it was the right thing 

to do. 

As we have this hearing, I don’t want to paint every credit counseling agency with a broad brush here and say that all consumers 

are being abused. But we had a system that was set up to help people in debt and to provide them with counseling and education and 

afterwards, if necessary, enroll in debt management plans. It appears from our investigation that what has happened in debt management plans for some of the new entrants in this market have 

become a product, a product to simply be marketed and to be sold. 

The person who loses out on that is the person who needs help, 

who is reaching out for help, who believes that they are going to 

a non-profit and finds out in the end that, in fact, they are not getting the counseling and the education that they need. 

In addition, who is hurt are the other agencies out there. I believe the best welfare program is a job. I want business to prosper. 

But if I am a consumer out there, I am not going to know who to 

call today. There are the NFCC and AICCCA, some of the organizations that work with these agencies, have done, in my opinion, a 

good job of working with their members, but it is going to become 

difficult to distinguish between who is doing the good job and who 

isn’t and I think that is unfortunate. We all get hurt by the actions 

of a few, and in this area, there is a lot of money being made and 

it certainly caused this Subcommittee to have a lot of concern. 

I look forward to the hearing today, and with that, I will turn 

it over to my distinguished colleague and Ranking Member, Senator Levin. 

7

OPENING STATEMENT OF SENATOR LEVIN 

Senator LEVIN. Thank you, Mr. Chairman, and thank you for 

calling these very important hearings. Your leadership here is critically useful and it is going to make a difference. 

The United States is awash in consumer debt. U.S. credit card 

debt alone now exceeds $730 billion. That is even larger than the 

country’s deficit at the moment, our annual deficit. Much of this 

consumer debt is owed by working families of modest means trying 

to make ends meet. Part is due to expenses associated with a 

health crisis, a death in the family, legal problems, a divorce, or 

a job loss. For many middle-income households, substantial debt is 

a fact of life and debt management is an urgent and a painful necessity. 

The issue that the Subcommittee is examining today under the 

leadership of our Chairman is how to ensure that persons who are 

struggling with debt and who turn to a credit counselor for help are 

protected against abusive credit counseling agencies seeking to exploit their financial distress. 

Traditionally, and hopefully in most cases today, credit counseling agencies are community-based, truly non-profit entities seeking to educate consumers about their finances and helping them to 

get back on their feet. For nominal fees, reputable agencies set up 

formal debt management plans for consumers to consolidate their 

debts, find ways to reduce the debts owed, establish a schedule for 

repaying them, and in many cases are able to reduce the interest 

rates owed. 

Such agencies will contact creditors like a bank or a credit card 

company and arrange for a waiver of late fees and penalties, negotiate a reduction in debt in return for a debtor’s promise to begin 

a regular repayment schedule. When done right, this work can save 

individuals and families from bankruptcy and financial ruin while 

helping creditors obtain some of the monies owed to them. 

The problem is that in recent years, a less benign type of credit 

counseling agency has infiltrated the credit counseling industry. 

These newcomers generally claim to operate as non-profits but are, 

in fact, organized to squeeze as much cash as possible from debtladen consumers and then funnel the bulk of it to insiders or forprofit affiliates. 

The 6-month Subcommittee investigation of three of the largest 

credit counseling conglomerates in operation today has documented 

a host of disturbing and abusive practices. One key abuse involves 

debtors being charged excessive start-up and monthly fees by a 

non-profit credit counseling agency to set up and administer a debt 

management plan. For example, instead of start-up and monthly 

fees of $23 and $14, the average charged in 2002 by credit counseling agencies who are members of the reputable National Foundation for Credit Counseling, the investigation found some agencies 

charging hundreds or even thousands of dollars per debtor. 

Consumers have also complained of being misled about their initial payment, believing it would go to their creditors when instead 

the money was kept by the credit counseling agency as a fee. The 

investigation also found that some agencies were providing little or 

no individualized counseling to their clients, instead, simply directing them to standardized debt management plans. 

8

In addition to excessive fees and poor counseling, the Subcommittee investigation found a pattern of non-profits funneling 

substantial amounts of cash to affiliated for-profit entities under 

the guise of paying processing costs or other charges. While reputable credit counseling agencies typically pay monthly processing 

costs of a dollar to two dollars per debt management plan, the 

monthly processing costs in the three case studies investigated by 

the Subcommittee are dramatically larger, typically $25 to $30 or 

more per plan. In this way, significant sums are transferred from 

the non-profits to an affiliated profit-making entity. 

The Subcommittee found, for example, in a one-year period between June 2001 and July 2002, one credit counseling agency sent 

over $80 million to its for-profit affiliate. Another for-profit entity 

over a 4-year period accumulated gross receipts from five different 

non-profit credit counseling agencies in excess of $386 million. 

At the same time, the related owners of the for-profit and nonprofit companies were paying themselves lucrative salaries. At one 

time, for example, in 2002, the owner and his brother each drew 

salaries of $624,000. This is not how non-profit community-based 

charities are supposed to operate. 

The staff report being released today details three case studies 

of credit counseling conglomerates which manage billions of dollars 

in consumer debt and are suspected of engaging in these kinds of 

abusive practices. All three groups will testify today. 

We will also hear from the two Federal agencies with key responsibilities for stopping credit counseling abuses. One is the Internal 

Revenue Service which has the power to determine whether a tax 

exempt CCA is acting as a front for a profit-making enterprise. The 

second agency is the Federal Trade Commission which has the authority to determine whether particular businesses are engaged in 

deceptive or unfair trade practices. Both agencies have begun to 

tackle the mounting problems in the credit counseling industry, but 

much more enforcement is needed. 

There is one more group that isn’t here today but also has an important role in stopping credit card abuses, and that is the creditors. This is a third group with a real interest in stopping these 

abuses. Major banks and credit card companies often support credit 

counseling agencies by providing them with a percentage of the 

payments made by the debtors they counsel. These so-called fair 

share payments are a key source of revenue for credit counseling 

agencies. Creditors can and should do a better job in screening the 

credit counseling agencies they support to stop abusive practices 

that hurt debtors and often leave them in worse shape after paying 

their bills. Creditors have powerful tools to help clean up the industry if they choose to use them. It is clearly in their own financial interest that the money owed to them actually reach them and 

not be skimmed by unscrupulous operators. 

Again, I commend Chairman Coleman for taking on this issue 

and for shining a spotlight on credit counseling abuses. Too many 

predatory credit counseling agencies are profiting at the expense of 

debt-laden consumers who are very vulnerable, at times leaving 

these consumers worse off than when they found them. It is time 

to stop these practices before they ruin a vitally needed community 

service sector. 

9

Again, I thank you, Mr. Chairman, for taking this issue on and 

for protecting America’s consumers. 

Senator COLEMAN. Thank you, Senator Levin. Senator Akaka. 

OPENING STATEMENT OF SENATOR AKAKA 

Senator AKAKA. Thank you very much, Mr. Chairman. I will 

make a brief statement and ask that my full statement be placed 

in the record. 

Senator COLEMAN. Without objection. 

Senator AKAKA. I appreciate your conducting this hearing today, 

Mr. Chairman, and all of the work that has gone into this thorough 

investigation of the credit counseling industry. 

Americans are carrying enormous amounts of debt, and let me 

mention some data from the Federal Reserve and Daily Bankruptcy 

News. In 2003, consumer debt increased for the first time to more 

than $2 trillion, according to the Federal Reserve. This is a 28 percent increase since the year 2000. According to the Daily Bankruptcy News, consumer debt is now equal to 110 percent of disposable income. Ten years ago, it was 85 percent, and 20 years ago, 

it was 65 percent. These are daunting facts. 

I have placed tremendous importance on the issue of economic 

and financial literacy so that individuals are able to make informed 

financial decisions in today’s complex modern economy. We must do 

more to increase financial literacy in our country to help people 

better manage their credit. 

I have sponsored a number of initiatives intended to increase the 

financial knowledge of students, adults, and investors, and I will 

continue to pursue these efforts to empower individuals to better 

manage their finances. 

In addition to education efforts, we must ensure that people 

seeking help in dealing with complex issues, such as debt management, are able to locate the assistance they need and ascertain the 

quality of such assistance. More and more working families are trying to survive financially and meet their financial obligations. They 

seek out help from credit counselors to better manage their debt 

burdens. It is extremely troubling that unscrupulous credit counselors exploit for their own personal profit, individuals who are to 

locate the assistance that they need. As debt burdens increase, people will need to seek more credit counseling. 

I am concerned that certain credit counseling agencies have 

abused their non-profit tax-exempt status. People believe sometimes, mistakenly that they can place blind trust in all non-profit 

organizations and that their fees will be lower than those of other 

credit counseling organizations. Too many individuals may not realize that the credit counseling industry does not deserve the trust 

that the consumers often place in it. 

Many credit counseling organizations simply lead their consumers to debt management plans. This may not be the best option 

for many consumers. Certain credit counseling agencies fail to provide consumers with their full range of options and recommendations. For some individuals, bankruptcy is appropriate for their set 

of circumstances and they may be better off in the long run declaring bankruptcy instead of having an ill-suited debt management 

plan imposed on them. 

10

This flagrant abuse of individuals seeking assistance to help 

manage their debts by certain credit counseling organizations is appalling. I intend to introduce legislation that will increase fee disclosures and prohibit certain unfair practices so that consumers are 

adequately protected. We must act to ensure that vulnerable individuals have access to financial education and counseling that they 

need. Consumers must be better informed about credit counseling 

fees and the possibility that debt management plans may not be 

appropriate for them. 

In addition, relevant financial arrangements with lenders or 

other financial service providers need to be disclosed to consumers. 

In the past, the majority of credit counseling organizations provided a reliable and valuable service to people in need. We must 

restore consumer confidence in this troubled industry. 

Mr. Chairman, I look forward to working with my colleagues and 

with you to restore trust in the credit counseling industry. Thank 

you very much. 

Senator COLEMAN. Thank you, Senator Akaka. 

[The prepared statement of Senator Akaka follows:]

PREPARED OPENING STATEMENT OF SENATOR AKAKA 

Thank you, Mr. Chairman. I appreciate your conducting this hearing today and 

all of the work that has gone into this thorough investigation of the credit counseling industry. Americans are carrying enormous amounts of debt. In 2003, consumer debt increased for the first time to more than 2 trillion dollars, according to 

the Federal Reserve. This is a 28 percent increase since 2000. The Congressional 

Research Service reports that the percentage of income used for household debt payments, including mortgages, credit cards, and student loans, rose to the highest 

level in more than a decade in 2001 and remained above 13 percent in 2003. According to the Daily Bankruptcy News, consumer debt is now equal to 110 percent of 

disposable income. Ten years ago, it was 85 percent, and 20 years ago, it was 65 

percent. It is also important to note that when interest rates do eventually rise, consumers will be faced with increasing debt obligations. These are daunting facts. 

I have placed tremendous importance on the issue of economic and financial literacy so that individuals are able to make informed financial decisions in today’s 

complex modern economy. We must do more to increase financial literacy in our 

country to help people better manage their credit. I have sponsored a number of initiatives intended to increase the financial knowledge of students, adults, and investors, and I will continue to pursue these efforts to empower individuals to better 

manage their finances. In addition to education efforts, we must ensure that people 

seeking help in dealing with complex issues, such as debt management, are able to 

locate the assistance they need, and ascertain the quality of such assistance. 

More and more working families are trying to survive financially and meet their 

financial obligations. They seek out help from credit counselors to better manage 

their debt burdens. It is extremely troubling that unscrupulous credit counselors exploit, for their own personal profit, individuals who are trying to locate the assistance that they need. As debt burdens increase, people will need to seek out more 

credit counseling. 

I am concerned that certain credit counseling agencies have abused their nonprofit, tax-exempt status. People believe, sometimes mistakenly, that they can place 

blind trust in all nonprofit organizations and that their fees will be lower than those 

of other credit counseling organizations. Too many individuals may not realize that 

the credit counseling industry does not deserve the trust that consumers often place 

in it. The Consumer Federation of America (CFA) found that 46 percent of agencies 

it surveyed encouraged debt management plan (DMP) participants to view their voluntary contributions as charitable donations. The representation that these fees are 

voluntary is often misleading and inaccurate. 

In addition, many of the fees imposed by credit counseling agencies appear to be 

excessive. The National Federation of Credit Consumers (NFCC) indicates that the 

average credit counseling organization in 2001 charged $14 for budget counseling 

sessions while most banks offered this information for free. Furthermore, the average agency charged $19 to enroll in DMPs, and $12 monthly to service them. ToVerDate 0ct 09 2002 13:25 Aug 17, 2004 Jkt 093477 PO 00000 Frm 00018 Fmt 6633 Sfmt 6621 C:\DOCS\93477.TXT SAFFAIRS PsN: PHOGAN
11

gether, these fees equaled $179 in expenses for participants during the first year 

of enrollment. NFCC has sited that some organizations are charging sliding and 

fixed monthly account fees as high as $50 and $95, respectively. 

Many credit counseling organizations simply lead their customers to debt management plans. This may not be the best option for many consumers. 

However, certain credit counseling agencies fail to provide consumers with their 

full range of options and recommendations. For some individuals, bankruptcy is appropriate for their set of circumstances and they may be better off in the long run 

declaring bankruptcy instead of having an ill-suited debt management plan imposed 

on them. 

This flagrant abuse of individuals seeking assistance to help manage their debts 

by certain credit counseling organizations is appalling. I intend to introduce legislation that will increase fee disclosures and prohibit certain unfair practices so that 

consumers are adequately protected. We must act to ensure that vulnerable individuals have access to financial education and counseling that they need. Consumers 

must be better informed about credit counseling fees, and the possibility that debt 

management plans may not be appropriate for them. In addition, relevant financial 

arrangements with lenders or other financial service providers need to be disclosed 

to consumers. In the past, the majority of credit counseling organizations provided 

a reliable and valuable service to people in need. We must restore consumer confidence in this troubled industry. I look forward to working with my colleagues to 

restore trust in the credit counseling industry. Again, thank you Mr. Chairman for 

conducting this hearing.

Senator COLEMAN. Senator Dayton. 

OPENING STATEMENT OF SENATOR DAYTON 

Senator DAYTON. Thank you, Mr. Chairman. I received a note 

that you are limiting your opening statements to 5 minutes. I 

haven’t been here long enough to be allowed to make opening statements. [Laughter.] 

This is a novelty for me, so that won’t be a problem. But I do 

want to commend you, Mr. Chairman, and this excellent staff for 

this excellent investigation report. It is very troubling, what you 

have uncovered, but it is very important as it affects, I am sure, 

many Minnesotans, whose concerns we share as well as others. 

I am mainly looking forward to hearing from the witnesses and 

getting a perspective of that and I want to compliment the Ranking 

Member also for involvement of himself and his staff. He has put 

me to shame, once again. While I was enjoying the balmy climes 

of Minnesota in March, he was in Iraq for the second time last 

week savoring that 115-degree or whatever the approximation is 

this time of year temperature. 

Anyway, thank you again, Mr. Chairman. Congratulations on excellent work and I look forward to hearing the witnesses today. 

Senator COLEMAN. Thank you very much, Senator Dayton. 

I would now like to welcome today’s first panel. Raymond 

Schuck, a consumer who used Cambridge Credit Counseling Corporation’s debt management services; John Pohlman, former employee of Cambridge Credit Counseling Corporation; Jolanta Troy, 

a consumer who used AmeriDebt’s debt management services; and 

Johnpaul Allen, a former employee of AmeriDebt. 

I really do appreciate all of you coming today to tell your stories. 

I want to thank you in advance for your courage in testifying. I 

know it is probably a pretty daunting thing to be sitting on that 

side of the hall here. 

As I mentioned in my opening statement, we are here to address 

problems that are facing the credit counseling industry. Mr. Schuck 

and Ms. Troy, you have had bad experiences with credit counseling 

12

1The prepared statement of Mr. Schuck appears in the Appendix on page 89. 

agencies, and since you have been most directly and unfortunately 

affected by the changes in the industry, I appreciate your willingness to share your stories with us today. And as former employees 

of credit counseling agencies, Mr. Pohlman and Mr. Allen will enlighten us to the inside operations of some of these new entrants. 

Before we begin, pursuant to Rule 6, all witnesses who testify before the Subcommittee are required to be sworn in. I would ask the 

witnesses to please stand at this time and raise your right hand. 

Mr. SCHUCK. May I take it by affirmation, please? 

Senator COLEMAN. Yes. Do you swear that the testimony you will 

give before the Subcommittee will be the truth, the whole truth, 

and nothing but the truth, so help you, God? 

Mr. SCHUCK. I so affirm. 

Mr. POHLMAN. I do. 

Ms. TROY. I do. 

Mr. ALLEN. I do. 

Senator COLEMAN. We will be using a timing system today. You 

will see the lights change from green to yellow to red. Yellow 

means time to wrap up. Your full statements will be entered into 

the record in their entirety. 

Mr. Schuck, we will begin with you first, followed by Mr. 

Pohlman, Ms. Troy, and Mr. Allen, and then after we have heard 

all the testimony, we will turn to questions. 

With that, Mr. Schuck, you may proceed. 

TESTIMONY OF RAYMOND SCHUCK,1 VICTIM, CAMBRIDGE 

CREDIT COUNSELING CORPORATION, LIMA, OHIO 

Mr. SCHUCK. Good morning, Mr. Chairman and Members of the 

Subcommittee. Thank you for the opportunity to share my story 

with you. I am Raymond Schuck and I am here today briefly to 

share my experience with you in dealing with Cambridge Credit 

Counseling. 

In the summer of 2001, after retiring from 20 years of serving 

as the director of a museum in Ohio, I found myself in a strained 

financial situation. I was having difficulty managing my debt, 

which had risen to the amount of approximately $90,000 distributed among nine credit cards and various banking institutions. 

I heard about Cambridge on the radio and I decided to look into 

what this non-profit credit counseling agency could do for me to 

help me manage my debt. I called Cambridge and spoke with a 

credit counselor. The counselor suggested a debt management plan. 

I was promised a considerable reduction in interest rates and that 

Cambridge could handle all my accounts. 

After answering a list of questions about my various credit cards, 

the counselor told me my monthly payment would be $1,946. He 

said that Cambridge could charge me, or would charge me 10 percent of my monthly payment for their services, which amounted to 

$194 a month. I thought this was high, but I knew very little about 

the industry and what was appropriate as far as a fee goes. Also, 

I made the apparently naive assumption that because it was a nonprofit agency, I could trust them. 

13

The counselor told me to hurry and send my first payment to 

Cambridge to get the program started. I sent in a cashier’s check 

and felt optimistic that I was on the right path. I put every credit 

card I could on the program except for one that I retained for emergencies. And then I started getting calls from some of my creditors. 

I received calls from three of my creditors asking me why I had not 

made payments. I told them I was with Cambridge on a debt management plan. Each of these creditors was unaware of this fact and 

told me that no payments had been received on my behalf. 

I called Cambridge to find out what was going on, and getting 

in touch with someone who knew about my debt management plan 

and the status of my payments was an exercise in frustration. 

When I was finally able to speak with someone in customer service 

who could tell me about my account, I was informed that the first 

payment I sent to Cambridge, almost $2,000, was a fee for constructing my debt management plan. I was absolutely shocked by 

this information. Had I known this policy in advance, I would have 

reached a different—certainly researched and looked into a different credit counseling agency. I would not have agreed to give 

Cambridge $2,000 when my money could have gone to my creditors. 

I made numerous attempts to get matters straightened out with 

my creditors on the late status of my accounts. Meanwhile, I was 

receiving no help from Cambridge. In fact, I found out that two of 

my cards actually never received payment from Cambridge, even 

though I had been on their plan for several months. 

Taking all this into consideration, I felt obligated to file a complaint against Cambridge with the Better Business Bureau of Massachusetts. Not only was I disappointed by Cambridge’s failure to 

provide any financial counseling or assistance to me, but also, I 

was actually financially worse off after dealing with this company. 

My credit rating was completely ruined because of the late payments, and in addition, I was even penalized for these late payments on my own credit card that I had left off the debt management plan. The card raised my interest rate from 9.9 percent to 24 

percent because they saw the late payments on the other accounts. 

After the mess of dealing with Cambridge, I went to a local credit 

counseling service. This agency accepted a monthly donation. There 

was no set-up fee like Cambridge. I was on a debt management 

plan with this agency for about 2 months when it became clear to 

me that the only reasonable option was to file for bankruptcy, 

which, in retrospect, I probably should have done in the first place. 

It seems to me that if Cambridge had done a reasonable analysis 

of my financial circumstances, the proper recommendation would 

have been to advise me that a debt management plan was not a 

feasible option. Putting me on a debt management plan that cost 

$2,000 plus a high monthly maintenance fee seems irresponsible 

and far from what one considers a normal practice for a non-profit 

agency. 

Having directed a non-profit organization myself for 20 years, I 

know that if I had operated my organization the way Cambridge 

operates their organization, my non-profit status would have been 

revoked. I can only conclude that credit counseling agencies such 

14

1The prepared statement of Mr. Pohlman appears in the Appendix on page 91. 

as Cambridge are more interested in making profits than they are 

in providing financial advice and education. 

Thank you for allowing me to tell my story and I look forward 

to answering any questions that you may have. 

Senator COLEMAN. Thank you, Mr. Schuck. Mr. Pohlman. 

TESTIMONY OF JOHN POHLMAN,1 FORMER EMPLOYEE, CAMBRIDGE CREDIT COUNSELING CORPORATION, EAST GRANBY, CONNECTICUT 

Mr. POHLMAN. Mr. Chairman, Senator Levin, and Members of 

the Subcommittee, it is an honor to be here today to testify about 

working in the credit counseling industry and specifically working 

at Cambridge Credit Counseling. 

I began working in the credit industry in 1991. I worked for two 

different National Foundation of Consumer Credit agencies until I 

was laid off by Consumer Credit Counseling Services of Southern 

New England, who was downsizing due to the state of the market. 

Large national credit counseling agencies were acquiring significant portions of the market, causing National Foundation of Consumer Credit agencies to merge amongst themselves or to close 

their offices altogether. 

With this in mind, I decided to look for a job with one of those 

larger organizations, so I applied and was hired as a counselor with 

Cambridge in September 2003. It did not take me long to realize 

that Cambridge’s approach to the credit counseling industry was 

fundamentally different from mine. I disagreed with most of Cambridge’s practices, particularly those that related to how they treated, managed, and served their customers. 

On the first day at Cambridge, I had to pick a false name. I 

chose my son’s name, Daniel. I thought this practice was very 

strange, although most every Cambridge employee uses a fake 

name when they are on the telephone talking to their customers. 

I did not understand why I was unable to use my own name when 

I was dealing with customers. I would always use my own name 

in the past. Even management personnel used different names. 

This, sir, was my first clue that I was about to take a trip down 

a disheartening path. I was immediately uncomfortable with the 

environment at Cambridge. I would describe it as a boiler room 

mentality. All the counselors were in a large room with video cameras on us all day long. You had to clock in and out to go to the 

bathroom, to eat lunch, even to make a personal call. 

There was an electronic board at the front of the room that reminded me of the leader board in a golf tournament. It had the 

names of the counselors who had top sales for the month in red 

and yellow flashing lights. This exhibited an obvious emphasis on 

the sale of debt management plans. 

In addition, I was surprised to learn that Cambridge paid commissions to its counselors based on the size of the up-front fees that 

are charged to their customers. A counselor could earn 25 percent 

of this amount. Some counselors were rewarded with 2-week sales 

trips to Florida for high sales volume. This was unusual to me, as 

15

it was clear it would give the counselor motive to enroll consumers 

on a debt management plan regardless of their financial situation. 

Along with positive incentives for sales, Cambridge also used 

negative incentives when a counselor had low sales. On the refrigerator in the Cambridge lunchroom, a sign hung on the refrigerator 

saying, ‘‘The two lowest producing counselors will be cleaning the 

refrigerator on Saturdays.’’

Cambridge’s overall approach to the consumer was the most 

troubling matter for me. I was entirely dissatisfied with the level 

of scrutiny this company gave to a consumer’s financial circumstances when making such important decisions as whether to 

go on a debt management plan. There are many options out there 

in addition to the debt management plan—education, self-budgeting, financial restructuring, and yes, in the worst case, bankruptcy. I never heard any of these options discussed by anyone at 

Cambridge. It was focused solely on the debt management plan. 

In my experience working at the National Foundation of Consumer Credit agencies, I would spend an hour and a half working 

with a consumer and their finances. When I was at Cambridge, 

this process was expected to take roughly 10 to 15 minutes, all the 

time that was needed because the only information that we got 

from the consumer was the account information. There was no true 

budget analysis done for the consumer. It was just an analysis to 

determine whether their creditors would allow the consumer to enroll in the debt management plan. 

I was uneasy with the fact that I did not know anything about 

the person’s mortgage payments, health care costs, car insurance, 

etc. How could I recommend this person to go on a debt management plan? I knew nothing about them except that they were in 

debt. 

With the time they spent with the consumer so limited, I had little confidence that they understood that the first payment was kept 

by Cambridge. In fact, I was trained to tell the customer, ‘‘I will 

be faxing you the paperwork. It is very simple and easy to fill out, 

shouldn’t take you more than 10 minutes.’’ But this was a pressure 

tactic that we were supposed to use. It was a goal to authoritatively take them through the process of signing up the plan as 

quickly as possible. I was even instructed by one member of management to ‘‘Treat them like alcoholics.’’ In other words, they need 

to know they need help. Make them get it. Be authoritative and be 

forceful. 

I truly believe that Cambridge preyed on a consumer’s desperation. In fact, I was regularly reprimanded for being too nice to consumers. I was told to stick to the scripts. There was no need for 

conversation or pleasantries. Words cost money and defeat the purpose. 

I only worked for Cambridge for 2 weeks, long enough to realize 

that the practices of companies like Cambridge can give the entire 

industry a bad name. Agencies like Cambridge abuse the trust and 

vulnerable position of financially stressed consumers and fail to 

provide any meaningful counseling or education. 

I came here today to help this Subcommittee understand that 

something must be done about the credit counseling agencies like 

16

1The prepared statement of Ms. Troy appears in the Appendix on page 93. 

Cambridge. The industry must be reformed for the good of the 

American consumer. Thank you. 

Senator COLEMAN. Thank you very much, Mr. Pohlman. Ms. 

Troy. 

TESTIMONY OF JOLANTA TROY,1 VICTIM, AMERIDEBT, INC., 

CARLISLE, PENNSYLVANIA 

Ms. TROY. Good morning, Mr. Chairman and Members of the 

Subcommittee. My name is Jolanta Troy and it is an honor to sit 

before you this morning to tell you about my experience with the 

company called AmeriDebt. 

In 1999, shortly after my divorce, I found myself in a terrible financial situation. I am a behavior specialist consultant. I work 

with mentally ill children and children with behavior problems. I 

love working with the kids, but I don’t necessarily make a lot of 

money. I have two young children who I have been raising by myself since my husband and I split up. I had to use my credit cards 

to help support my children and myself. The expenses started adding up and my credit card debt reached a level I could not manage. 

I was $30,000 in debt. 

I was very upset and depressed at this time of my life. I was in 

terrible financial trouble. I was worried about my bills and losing 

my house. I had no family here and nobody to turn to to borrow 

money from or for support. 

I saw a commercial for AmeriDebt on television. They said they 

were a non-profit company, so I called AmeriDebt and I spoke with 

a counselor who told me to go on a debt management plan. I wasn’t 

sure what to do and I wanted to think about it for a while. After 

this call, the counselor called me back four times, four different 

times. Every time the counselor called, she would tell me how bad 

my situation was and that I needed to do something about it. This 

counselor also said that AmeriDebt was a non-profit organization, 

like a charity, and that I needed their help. She was very pushy 

and almost degrading. She made me feel embarrassed and 

ashamed, but I eventually decided to go on the program. 

The AmeriDebt counselor told me there would be a small monthly charge, but since they were a non-profit, I was not worried about 

the fees. The counselor told me to send a money order to 

AmeriDebt right away for $783 so they could start my payment 

program as soon as possible. So I sent AmeriDebt $783 and believed my debt management program would be set up immediately 

and money would be going to my creditors. 

Then I started receiving calls from the credit card companies 

asking why I had not paid them. I tried to get in touch with my 

counselor at AmeriDebt. I called customer service and they told me 

that AmeriDebt kept the money as a voluntary contribution. I 

knew that I agreed to a monthly charge, but I knew nothing about 

them keeping my first payment as a voluntary contribution. This 

was the first I heard of this. 

I told AmeriDebt that I wanted a refund. They said it was too 

late and they would not give me a refund. I was devastated. I 

wrote to Better Business Bureau, but AmeriDebt still would not reVerDate 0ct 09 2002 13:25 Aug 17, 2004 Jkt 093477 PO 00000 Frm 00024 Fmt 6633 Sfmt 6601 C:\DOCS\93477.TXT SAFFAIRS PsN: PHOGAN
17

1The prepared statement of Mr. Allen appears in the Appendix on page 95. 

fund my money. AmeriDebt wrote a letter saying that I had agreed 

to make a contribution. That was not true. They never refunded my 

money to me. I could not afford to give AmeriDebt $800. I thought 

that money would go to my credit cards to pay down my balances. 

I did not have any money left over to pay my credit card bills 

that month. I was still getting calls from my creditors. They were 

now charging me late fees because they had not received my payments. I was in a worse position than before I went to AmeriDebt. 

I felt that I had no choice but to go to a lawyer to help me file for 

bankruptcy. I wanted to be able to pay my bills, but my income 

only stretched so far. 

I am here today so that no other person has to go through what 

I did. AmeriDebt took advantage of me. They present themselves 

as some kind of charity there to help people. Instead, they took almost $800 from me when they knew how bad my finances were. 

This company preyed on me when I was at a most vulnerable time, 

when I was frightened and unsure how to manage my finances. I 

feel like my fears were manipulated by AmeriDebt for their own 

benefit. Something must be done to stop companies like AmeriDebt 

who are making money off good people who are just trying to do 

the right thing. 

Thank you very much. 

Senator COLEMAN. Thank you, Ms. Troy. Mr. Allen. 

TESTIMONY OF JOHNPAUL ALLEN,1 FORMER EMPLOYEE, 

AMERIDEBT, INC., NEW MARKET, MARYLAND 

Mr. ALLEN. Mr. Chairman, Senator Levin, and Members of the 

Subcommittee, good morning. My name is Johnpaul Allen. I am 

speaking to you this morning because of my experience as an employee with AmeriDebt. I worked at AmeriDebt as a credit counselor during the summer of 2003. My experience at AmeriDebt was 

frustrating and disappointing. 

I was interested in being a credit counselor because I enjoy working with people and helping them. I thought that working for a 

non-profit organization would be a great way to interact with people and to actually make a difference in somebody’s life. What I 

found at AmeriDebt was nothing short of a sweatshop, a telemarketing outfit taking advantage of thousands of people in bad financial situations. 

I should have seen a red flag during my interview with 

AmeriDebt when I was asked by my interviewers to sell them a 

stapler to prove that I can make a sales pitch. That is really what 

AmeriDebt is all about, sales. The goal for AmeriDebt’s counselors 

was to sell consumers a debt management plan regardless of 

whether they needed it or not. When I was training for my position 

as a counselor, I asked about the education provided to consumers 

on financial matters. I was told by management to ‘‘concentrate on 

getting them on a debt management plan.’’

Throughout my time working at AmeriDebt, I was reprimanded 

for spending too much time with consumers on the phone. When 

I was trained, I was told that each call should take no more than 

20 to 25 minutes and I would generally spend at least that long 

18

with each caller explaining our program. Several times, I was instructed to spend less time on each call and that my calls should 

be no more than 15 minutes. This bothered me because I didn’t 

want to have to rush through such important things with consumers who really needed my help. 

Another thing I was repeatedly reprimanded for was the information I was giving to customers. AmeriDebt charges a set-up fee 

and a monthly fee, or as they call it, a ‘‘voluntary contribution.’’ 

The consumer was supposed to have a choice whether they wanted 

to pay the contributions. I would always tell the customer that they 

did not have to pay the voluntary contribution, or if they wanted, 

they could make the initial contribution or the monthly contribution and not necessarily both. At least two or three times a week, 

I would get pulled aside by my managers and instructed to make 

sure that consumers paid the voluntary contribution. The managers would say such things to me like, ‘‘Do you know that you are 

letting them choose to pay or not to pay your salary?’’ Or, ‘‘Think 

of all the money you could make if you collected those voluntary 

contributions.’’

What they were referring to were the bonuses that could be 

made for enrolling people on debt management plans. AmeriDebt 

would pay you a commission every 2 weeks for the number of debt 

management plans you signed up or if you hit a certain amount of 

voluntary contributions. 

The pressure to get people signed up on the debt management 

plan was significant. In fact, the only time we were allowed to go 

off the script on a call was when a customer was not going to give 

the voluntary contribution. We were instructed to say things like, 

‘‘Don’t you want us to be around for the next person?’’ We would 

tell them that we were a non-profit corporation and thus subject 

to be audited by the IRS in an effort to gain their trust in our fees 

and their reasonableness. These were practices that seemed 

strange for a non-profit organization. 

In addition to feeling like a used car salesman pushing these 

debt management plans, I also had concerns about the service that 

these customers were getting after they set up on a plan. I would 

get calls from people 2 or 3 months after I set them up on a plan 

complaining that their creditors had still not received a payment. 

The only thing I could do was to refer them to The Ballenger 

Group. I did not have access to the consumer’s payment information. 

One time, I took a special interest in a particular client’s predicament. This man was named Derek and he kept calling me because 

his creditors were not getting paid. I tried several times myself to 

get in touch with someone over at The Ballenger Group so I could 

help this man, but to no avail. I felt helpless and responsible, since 

it was me personally who had enrolled Derek on the debt management plan. 

I made the decision to leave AmeriDebt shortly after that. I 

wanted to help these people, but in the end, I felt I had done them 

a disservice. I can relate to these people. I have been through tough 

financial times myself and have had to file bankruptcy several 

years ago. I know how these people feel. No one wants to declare 

bankruptcy. The average person wants to take responsibility and 

19

1See Exhibit No. 2 which appears in the Appendix on page 241. 

pay their bills. They want to do the right thing and AmeriDebt just 

pulls the rug right out from underneath them. 

I am thankful for the opportunity to be heard on the real need 

for change in the practices of the companies like AmeriDebt and I 

thank you for your time. 

Senator COLEMAN. Thank you very much, Mr. Allen. 

Each of the witnesses talked about non-profit. Ms. Troy, you 

mentioned it twice in your testimony, that it was a non-profit. Mr. 

Allen, I think I would describe you as talking in altruistic terms, 

working for a non-profit, wanting to help people. For the sales people, was there any doubt in your mind that the use of the non-profit was as a vehicle to get the trust of the customer? 

Mr. ALLEN. Without a doubt. 

Senator COLEMAN. Was there any question about that? 

Mr. POHLMAN. No. 

Mr. ALLEN. If I were to tell you that we were a 501(c)(3) corporation subject to be audited by the government every 3 months, I believe people do put a little trust in that. 

Senator COLEMAN. Mr. Schuck, you have worked with non-profits. Did you come in with a preset notion of it being a non-profit? 

What did that mean in the back of your mind? What were your expectations of dealing with a non-profit? 

Mr. SCHUCK. My expectations were that I could trust them. I felt 

they had the fiduciary responsibility as a non-profit to take that 

trust and hold it sacred and, therefore, I felt quite comfortable 

working with them initially until actually I started to and then it 

changed and went the other way. 

Senator COLEMAN. Both Mr. Pohlman and Mr. Allen—excuse me. 

Ms. Troy, you mentioned that twice. You used the phrase non-profit. Can you tell me what, in the back of your mind, what you were 

thinking? 

Ms. TROY. Yes. For me, I understood non-profit organization as 

an organization which is getting donations or grants from some 

sources, the State possibly, and I was sure that those were trusted 

sources. I never thought that they might be actually making profits. I thought they were designated to help people. 

Senator COLEMAN. Mr. Allen, you made a comment and we have 

a chart there, for the DebtWorks-Ballenger Group.1 I think 

DebtWorks is a predecessor to The Ballenger Group, but The 

Ballenger Group then would be where DebtWorks is today. You 

made the comment that you were concerned about one of your customers——

Mr. ALLEN. Yes, sir. 

Senator COLEMAN [continuing]. And when you wanted to track 

down what happened, you said you had to check with The 

Ballenger Group? In other words, there wasn’t anybody within 

AmeriDebt who could answer those questions? 

Mr. ALLEN. There was no one at AmeriDebt that could answer 

the questions. I would try to go in to my supervisor, to go to my 

supervisor’s supervisor, tried going up the chain as best I could to 

no avail. They didn’t have the questions. 

20

Senator COLEMAN. Did you understand what the relationship 

was between AmeriDebt and The Ballenger Group? 

Mr. ALLEN. I did. From the time that we get a consumer’s information back, it is checked over and then it is sent over to The 

Ballenger Group. The Ballenger Group is the group of people that 

are responsible for setting up the program, contacting the creditors, 

or so we thought. So it seemed natural to get a hold of The 

Ballenger Group to find out what is going on with this particular 

person’s case. 

Senator COLEMAN. Were you aware that DebtWorks or The 

Ballenger Group you dealt with is a for-profit organization. 

Mr. ALLEN. Yes. 

Senator COLEMAN. Both of you, to Mr. Pohlman and Mr. Allen, 

talked about the environment. I just want to touch on what is probably obvious here, but when you talked about sales and bonuses, 

were there any bonuses for enrolling people in an education program? Mr. Pohlman. 

Mr. POHLMAN. No, absolutely not. 

Senator COLEMAN. Mr. Allen. 

Mr. ALLEN. The only thing I educated people on was how to send 

their payment in. 

Senator COLEMAN. And the big board, Mr. Pohlman, that you 

talked about, was there any doubt in your mind that board was 

about sales of debt management plans? 

Mr. POHLMAN. Oh, absolutely not. You wanted to be there. I 

wanted to see my name up there some day——

Senator COLEMAN. What kind of bonuses, were they? 

Mr. POHLMAN. Training trips to Florida. There was a commission 

based on the amount of DMPs that we sold, in addition to an hourly wage, in addition to health care benefits. So it was clear there 

was an emphasis on putting people on the DMP. 

Senator COLEMAN. Both to Mr. Schuck and Ms. Troy, I want to 

kind of focus again on this education issue. Non-profits are supposed to provide education. Mr. Schuck, can you tell us what kind 

of education or what kind of counseling you received from Cambridge? 

Mr. SCHUCK. I received absolutely no counseling and absolutely 

no education. 

Senator COLEMAN. You were asked to make your payment at 

what point in time in this transaction? 

Mr. SCHUCK. My estimated payment? 

Senator COLEMAN. When were you asked to make it? 

Mr. SCHUCK. Oh, when was I asked to make the payment? 

Senator COLEMAN. Yes. 

Mr. SCHUCK. Oh, I am sorry. As soon as I had the initial contact 

with a fellow from Cambridge. He asked me to make a payment 

and that the payment should be in the form of a cashier’s check 

or a money order, not a personal check, and that I should send it 

out immediately. In fact, before I even had signed the contract, he 

wanted payment. 

Senator COLEMAN. So you, in fact, sent out a cashier’s check. 

Mr. SCHUCK. That is right. 

Senator COLEMAN. This is before any education, of which there 

was none, any counseling, of which there was little or none? 

21

1See Exhibit No. 4 which appears in the Appendix on page 243. 

Mr. SCHUCK. Oh, yes. 

Senator COLEMAN. Ms. Troy, you made an attempt to get back 

your money. During the course of this time as you tried to get it 

back, can you talk about the education and the counseling that you 

received from AmeriDebt? 

Ms. TROY. There was no education, absolutely none. It was just 

pushing me to set up a management plan, the bill management, 

debt management plan, and actually to make a payment on time 

because there was a due date, so I sent the money Western Union 

as soon as I got my paycheck. But there was absolutely no education, no support of any kind. 

Senator COLEMAN. Mr. Pohlman and Mr. Allen: One of the goals 

of credit counseling, I presume if you are going to solve a problem, 

is to analyze somebody’s financial situation. Can you give me a little more information on what kind of budget analysis that you were 

instructed to do for your clients? Mr. Pohlman. 

Mr. POHLMAN. Yes, sir. I was not allowed to give any budget 

analysis to the client. What I was able to do was to give them a 

script. I was to get them to commit to me sending them the paperwork. It was seven pages of paperwork. I was told to tell them it 

was very easy to fill out. It would take 10 minutes. They would 

send it back to me via fax and I would have their new payment 

amount later in the day. So there was no budget analysis. 

Senator COLEMAN. So you were attempting to enroll people in the 

DMPs before any budget analysis? 

Mr. POHLMAN. Absolutely. 

Senator COLEMAN. Is a debt management plan the right path for 

every person in debt? 

Mr. POHLMAN. No, absolutely not. There are many other areas. 

There is self-administration. There is referral to other non-profit 

agencies. There is certainly the legal option. 

Senator COLEMAN. And I presume there are times when you simply look at the facts and say that bankruptcy may be the option 

for that person. 

Mr. POHLMAN. Of course, particularly in a very large deficit and 

depending on the creditors involved. 

Senator COLEMAN. But the only bonuses and the only incentives 

that both you and Mr. Allen were given was for signing up debt 

management plans? 

Mr. POHLMAN. Exactly. 

Senator COLEMAN. Mr. Schuck paid a fee of close to $2,000 dollars. Eleven years in the business, can you assess, in terms of the 

amount of that fee, do you find that unusual? 

Mr. POHLMAN. It is appalling. It makes me very upset. 

Senator COLEMAN. Mr. Schuck, you did sign a contract,1 and I 

think we have a copy of that. 

Mr. SCHUCK. Yes, I had. 

Senator COLEMAN. And that contract did provide a disclaimer in 

there about the payment, is that a fair statement? 

Mr. SCHUCK. You have to find it, but it is in there. 

Senator COLEMAN. How many pages is that contract? 

22

1See Exhibit No. 14 which appears in the Appendix on page 00. 

Mr. SCHUCK. I don’t recall the exact number, but I know it was 

a multi-page contract. 

Senator COLEMAN. Is that exhibit a copy of the conract that we 

are looking at now? Is that a copy of the contract? 

Mr. SCHUCK. Yes, it is. It looks exactly like the one that I signed. 

Senator COLEMAN. Five pages? 

Mr. SCHUCK. That is right. 

Senator COLEMAN. But there is on the second page, I do note, 

there is a provision in there that says, summary of Cambridge’s 

fee. Monthly payment design fee equals proposed monthly payment 

equals one time only. 

Mr. SCHUCK. I see that. That is right, yes. And actually, it was 

only later that I realized that was the initial fee. I had no reason 

at all to believe that first payment wasn’t going to my creditors. 

Senator COLEMAN. Ms. Troy, did you have any reason to believe 

that you were paying, was it $783——

Ms. TROY. Seven-hundred-eighty-three dollars, yes. 

Senator COLEMAN [continuing]. That money was going to the 

credit counseling agency rather than to your creditors? 

Ms. TROY. No. I had no idea until I started to get calls from the 

creditors. I was sure that was going to my monthly payments. And 

then I confirmed with AmeriDebt that they received my payment 

and they said they did, and when I talked to the customer service, 

that is when I found out that the first payment is my voluntary 

contribution. 

Senator COLEMAN. Mr. Allen, you talked about a script. 

Mr. ALLEN. Yes, sir. 

Senator COLEMAN. Mr. Pohlman, did you have a script? 

Mr. POHLMAN. Absolutely. 

Senator COLEMAN. In that script, were there—and I think we 

have a copy,1 I am not sure whether it is for Cambridge or 

AmeriDebt—but were you given responses if someone said that, ‘‘I 

don’t think I want to make a payment now,’’ or ‘‘I don’t want to 

make a voluntary contribution?’’ Would the script provide your answers? Mr. Allen. 

Mr. ALLEN. There were no set answers given to us from a script 

as to how to deal with that. We were given guidelines, suggestions 

from supervisor, training staff. I believe I made mention of it in my 

statement. We were supposed to make them feel guilty, make them 

ashamed that they weren’t going to keep us around for the next 

person. 

Senator COLEMAN. When you were credit counseling, did you 

have a training manual? Did you ever take a look at that? 

Mr. ALLEN. Yes, I did. 

Senator COLEMAN. And in that manual—this purports to be a 

copy of a page from the Credit Counseling training manual.1 Does 

that look familiar to you? 

Mr. ALLEN. Yes, it does. 

Senator COLEMAN. And at one point, it says for the statement, 

‘‘I cannot afford a contribution now, but maybe I can afford to contribute later,’’ and do you have a prepared response that you are 

supposed to give back? 

23

Mr. ALLEN. Again, it was something that we were to make up on 

the spot. We were supposed to use our selling techniques. 

Senator COLEMAN. The idea was to do what? 

Mr. ALLEN. The idea was, if you can do this later, why can’t you 

do this now? What is keeping you from doing it right now? It was 

all about the ‘‘right now.’’

Senator COLEMAN. Thank you, Mr. Allen. Senator Levin. 

Senator LEVIN. Thank you, Mr. Chairman. 

First, Mr. Schuck, you were told to send in a cashier’s check, not 

a personal check? 

Mr. SCHUCK. That is right. 

Senator LEVIN. Why was that? Did they tell you why they wanted a cashier’s check instead of——

Mr. SCHUCK. No, they did not. I only had to surmise that it perhaps was safer and that was it. But they did not explain why. They 

just simply said they would not take a personal check. 

Senator LEVIN. And you were told originally on the phone that 

10 percent of your check would go to them for a fee? 

Mr. SCHUCK. That is right. 

Senator LEVIN. Did they distinguish between a monthly fee and 

your original fee? 

Mr. SCHUCK. Not that I intentionally recall. I know the initial 

payment had to be made because that is what they said, they needed to get started. And like I said, in my thoughts, thinking my 

creditors are being paid, and that there would be then a monthly 

fee of 10 percent of every payment that I made that would go toward a maintenance fee of the contract for the life of the contract 

period. 

Senator LEVIN. Did they distinguish between the initial fee and 

the monthly fee? 

Mr. SCHUCK. Yes, they did, actually. 

Senator LEVIN. And then what——

Mr. SCHUCK. There were two separate——

Senator LEVIN. What did you believe the initial fee would be? 

Mr. SCHUCK. Well, I thought the initial fee would go toward my 

creditors. I thought that initial monthly fee was actually like what 

I would consider my first payment, my first fee. 

Senator LEVIN. So that after that conversation, you believed that 

all of the check you were sending would go to your creditors, and 

from that point on, 10 percent of each of your monthly checks——

Mr. SCHUCK. Each monthly fee would be the maintenance fee, 

that is right. Actually, I thought the first $196 or whatever it was, 

the 10 percent of that first payment, was actually the maintenance 

and start-up fee. That would be, to me, in my mind, that was what 

their fee would be to run the program, basically, and that the 

$2,000 that I sent or the other amount would be the amount that 

is paid to my creditors. Of that, 10 percent would come out for 

them. 

Senator LEVIN. How many payments did you make? 

Mr. SCHUCK. Several payments. I was in the program for, I believe, maybe half a year, 7 months, and finally after calls and trying to work out some sort of a compromise with them, I simply 

could not and I just simply stopped——

Senator LEVIN. There were several payments that were made? 

24

Mr. SCHUCK. That is right. 

Senator LEVIN. As many as three or four? 

Mr. SCHUCK. Oh, absolutely. 

Senator LEVIN. Out of the second, third, fourth payments, did 

they retain 10 percent and send the rest of those payments to your 

creditors? 

Mr. SCHUCK. I can only assume that they had. I did not receive 

something that indicated to me that they might not have. 

Senator LEVIN. So the difficulty you had with creditors was over 

that first payment which did not get to the creditors, not over the 

10 percent that may have been withheld from your second through 

your fifth or sixth payment? 

Mr. SCHUCK. I believe that is right, because apparently the creditors, when I called them—I remember one day specifically where 

I had called—a creditor called me. I talked with them. They said 

they hadn’t received payment. I called Cambridge and said they 

said they hadn’t received payment. What is going on? They said, 

‘‘No, we have paid them.’’ And then I called the creditor back and 

they said, no, indeed Cambridge had not paid them. And so there 

seemed to have been more than just that one payment. 

Senator LEVIN. And Mr. Pohlman, what did you represent to 

folks about that first payment? 

Mr. POHLMAN. We also had scripts at Cambridge that were very 

highly structured. We were not allowed to take the employee handbook, or bible, as I called it, home. The idea was to get them to 

commit to the plan. Yes, they were told verbally that the first 

month’s fee would be retained by the organization, but again, I had 

to fax the paperwork to them. They had to fill it out. They had to 

send it back. 

So yes, I told them there was a monthly fee up front, but I didn’t 

even know what it would be until it came back from the Automated 

Underwriting Department and then I would tell them. But by then, 

they have already forgotten about it or they are too excited that 

someone is going to take all the pain away from them. So it was 

really kind of an illusion, if you will. In other words, they were verbally told in a 5 minute conversation, perhaps while they were 

driving, that, yes, there is a service fee that is retained by the 

Cambridge organization. 

Senator LEVIN. From the first payment? 

Mr. POHLMAN. Yes, sir. 

Senator LEVIN. Were you told to create an impression of any kind 

relative to the first fee going totally to the——

Mr. POHLMAN. Oh, gosh, no. Again, these were highly structured 

scripts in which——

Senator LEVIN. Yes, but when you say highly structured, what 

was the impression that was created in the mind of the listener, 

that it was all going to the company? 

Mr. POHLMAN. The impression—no——

Senator LEVIN. That a part of it was going to the company? 

Mr. POHLMAN. The clients were told that 1 month, the first 

month’s fee, was a service type of fee and it was to be retained by 

the organization. I don’t recall their exact verbiage, but the verbiage was very confusing, very authoritarative. It was glossed over. 

25

Senator LEVIN. Are you surprised that people like Mr. Schuck got 

the impression that the first month’s payment would go to creditors? 

Mr. POHLMAN. No, absolutely not. 

Senator LEVIN. That doesn’t come as a surprise to you no matter 

what it was that you were saying on your script? 

Mr. POHLMAN. No, sir. 

Senator LEVIN. Ms. Troy, what were you told in terms of that 

first payment? 

Ms. TROY. As far as I recall, the first conversation with the counselor, I was told that I would be paying about $5 per account. That 

would be the monthly fee which will be going from month to 

month. And based on my number of my credit cards, I figure it will 

be probably about $30, $35 a month. She mentioned a voluntary 

contribution and I told her, I am not in a position right now to give 

any voluntary contributions to anybody. And she said, well, you 

don’t have to. We can do that later. Just don’t worry about it. It 

was just something like that. 

Senator LEVIN. And what about that first month’s payment? 

What were you told about it? Was that any different from the other 

payments that would follow? 

Ms. TROY. No. I was not informed about any difference. To my 

full knowledge, the first payment I sent, it was going to cover my 

debts to my creditors. 

Senator LEVIN. And that is the impression you got from the 

phone call? 

Ms. TROY. Definitely, yes. 

Senator LEVIN. And you signed a contract, as well? 

Ms. TROY. I believe I signed the contract. 

Senator LEVIN. Did you read the contract, or could you have read 

it given the size of the print? 

Ms. TROY. I have difficulties with reading without glasses——

Senator LEVIN. You should try a magnifying glass on some of 

those contracts. 

Ms. TROY. From now on, I will. 

Senator LEVIN. Mr. Allen, were you surprised to hear that Ms. 

Troy believed that her fee that was sent in, or the check that was 

sent in with her first payment, she thought would go to her creditors? Does that surprise you? 

Mr. ALLEN. Yes and no. As a counselor, I gave my consumers a 

choice. Because we were a non-profit organization, I took it at face 

value. If we are not here to make a profit, why should I push the 

contributions? I gave people a choice. They could either do a 

monthly contribution, and by the time I came on in 2003, the costs 

had risen slightly. It was now $7 for every creditor you put on the 

program, with a $20 minimum and a $70 maximum that 

AmeriDebt would accept as a monthly payment. 

Senator LEVIN. As the alternative to what? 

Mr. ALLEN. As an alternative to not make a contribution——

Senator LEVIN. At all? 

Mr. ALLEN. At all. 

Senator LEVIN. And could you be given that service if you made 

no contribution? 

Mr. ALLEN. Supposedly. 

26

Senator LEVIN. Did you have people who were serviced by your 

company who made no contribution whatsoever? 

Mr. ALLEN. I serviced many consumers that decided not to give 

a contribution one way or another. 

Senator LEVIN. And were they serviced, do you know? 

Mr. ALLEN. As far as I know and as far as I hope. I hope 

that——

Senator LEVIN. You hope they were? 

Mr. ALLEN [continuing]. What they signed for is what they got. 

Senator LEVIN. And so they may or may not have been serviced 

if they made no contribution whatsoever, either up front or monthby-month, is that correct? 

Mr. ALLEN. Very true. 

Senator LEVIN. So you just don’t know that part of it? 

Mr. ALLEN. I just don’t know. I never saw them, the maintenance 

of these——

Senator LEVIN. And were they told that the first payment that 

they would send, like the $700-and-some that Ms. Troy sent, would 

go entirely to the company? Is that the impression which was left 

with them? Her impression was only a small part of it, as I remember her testimony, would go to the company, the rest to her creditors. Are you surprised that she had that impression? 

Mr. ALLEN. I am surprised that it actually happened based on 

what her counselor had told her. If her counselor had said, we will 

not worry about it at this point in time, to me, that seems then my 

first payment is going to my creditors. Now, like I said, I can only 

speak for myself and the type of counselor that I was. 

Senator LEVIN. I understand. And then were you told that you 

could send a personal check? 

Ms. TROY. No. They didn’t accept personal checks. I had to obtain 

cashier’s checks from my bank because it was the only option, cashier’s checks or money order. 

Senator LEVIN. Did they explain to you why they would not accept a personal check? 

Ms. TROY. No, they didn’t, but I figured that maybe, if people realized what went wrong, they can always stop the check. You cannot stop the money order or cashier’s checks. 

Senator LEVIN. Thank you. Thank you, Mr. Chairman. 

Senator COLEMAN. Senator Dayton. 

Senator DAYTON. Thank you, Mr. Chairman. I want to thank all 

of you for coming forward today and sharing your experiences with 

the Subcommittee. 

Mr. Schuck, when did you contact Cambridge Credit? 

Mr. SCHUCK. I contacted them when I realized that I simply 

wanted to control the debt that I had. 

Senator DAYTON. What date? At what point in time? 

Mr. SCHUCK. It was—point in time—it must have been about in 

June or something in 2001. 

Senator DAYTON. Two-thousand-one, OK. 

Mr. SCHUCK. I believe it was——

Senator DAYTON. Were you sent then at some point in the process this service plan, service agreement? 

Mr. SCHUCK. I am sorry? 

27

Senator DAYTON. Were you sent at some point in the process a 

service agreement? 

Mr. SCHUCK. Yes, sir, I was. 

Senator DAYTON. And when was that in the process? 

Mr. SCHUCK. It would have been after I talked with them, they 

indicated they would be able to fax me a copy of the service agreement. 

Senator DAYTON. And did you read the agreement, then? 

Mr. SCHUCK. Well, I read it as fast and as close as I could thinking——

Senator DAYTON. And you were——

Mr. SCHUCK [continuing]. The sooner I get it back, the better off 

I will be. 

Senator DAYTON. But you were not aware, based on your review 

of that document, of this monthly payment—the first monthly payment was, in fact, going to be a set-up management fee to them? 

Mr. SCHUCK. No, I was not. No. And certainly in retrospect, now 

looking back, I should have read the document a lot closer. It was 

only several months later that I realized that. 

Senator DAYTON. Mr. Pohlman, you joined the company in September of last year? 

Mr. POHLMAN. Yes, sir. 

Senator DAYTON. I don’t know what changed in terms of the format of the document that was sent. This one is five-pages, singlespaced. We have a document that has been provided by the company. You haven’t had a chance to see that, but at what point in 

the process was that document sent to your people you were recruiting? 

Mr. POHLMAN. Just about right on the first contact, sir. I was 

going to explain myself, the organization, and how we can help 

them. I was to push and push and push until I could fax the service agreement and the creditor information to them. I was to tell 

them that it was very simple to fill out, takes about 10 minutes. 

They were instructed to fax it back to me immediately and I would 

be calling them back later that day with their new payment 

amount. 

Senator DAYTON. So they are getting the service plan. Are they 

then at that point aware of what their actual monthly payment is 

going to be? 

Mr. POHLMAN. No. When I am faxing the service agreement to 

them, they are to review it and review it closely, fill out their creditor information, send it back to us. We would process that and 

then I would contact them later today with their new payment 

amount. 

Senator DAYTON. OK. So they are signing this document——

Mr. POHLMAN. The agreement——

Senator DAYTON [continuing]. They are agreeing to terms without knowing what those terms are, if they haven’t received word 

about what their monthly payment is going to be, and the 10 percent on top of that. 

Mr. POHLMAN. But I am faxing them out the five-page service 

agreement——

Senator DAYTON. Right. 

28

Mr. POHLMAN [continuing]. A one-page cover sheet and the creditor sheet. 

Senator DAYTON. Right, and they are filling that out and they 

are signing a document here that I believe is—I haven’t read the 

whole document, but is an agreement they are making for payment 

of an amount that has not yet been specified to them, is that——

Mr. POHLMAN. The first month’s payment. 

Senator DAYTON. The first month’s payment, all right. What is 

the value to the client of this arrangement? You are consolidating 

all or some portion of their existing credit card debt——

Mr. POHLMAN. Right. 

Senator DAYTON [continuing]. And then that determines the 

monthly payment, and then on top of that is a 10 percent fee collected by or retained by Cambridge Credit. What does that monthly 

payment amount to? 

Mr. POHLMAN. Typically a repayment of a debt management plan 

is 3 to 5 years, depending on the amount of the debt. 

Senator DAYTON. So you are paying off the credit card companies 

based on a monthly payment of X amount——

Mr. POHLMAN. Yes. 

Senator DAYTON [continuing]. And then in addition to that X 

amount, there is another 10 percent surcharge on that? 

Mr. POHLMAN. No. It would have been included in the total——

Senator DAYTON. Included in that, OK. 

Mr. POHLMAN [continuing]. Payment amount. 

Senator DAYTON. So that 10 percent is in there. So the 90 percent, then, is sufficient to pay off these existing debts plus interest 

within 3 to 5 years. 

Mr. POHLMAN. That is the theory. 

Senator DAYTON. Do you make that computation? 

Mr. POHLMAN. No, sir. I believe it was an automated process in 

the computer system. 

Senator DAYTON. So you plug in the information and then the 

computer spits out the terms? 

Mr. POHLMAN. No. They were highly sophisticated. The client 

was instructed to fax the information back to us and it was faxed 

into their system and it was electronic from there on. 

Senator DAYTON. Electronic being that some computation then is 

made of the amount necessary to pay off all the debts within three 

to 5 years plus the 10 percent surcharge for the company. 

Mr. POHLMAN. Yes, sir. Creditors have minimums and there are 

some——

Senator DAYTON. Right, and that is all included in the 90 percent. 

Mr. POHLMAN. Yes. It is all included in the monthly payment 

amount. 

Senator DAYTON. So what is the benefit to the client? 

Mr. POHLMAN. I don’t see any. 

Senator DAYTON. But what are you representing as the benefit 

when you sign up the client? 

Mr. POHLMAN. That they are going to be debt free within a specified period of time. 

Senator DAYTON. Is there any value in that? You are basically in 

sales. If he calls back to try to get any clarification of the informaVerDate 0ct 09 2002 13:25 Aug 17, 2004 Jkt 093477 PO 00000 Frm 00036 Fmt 6633 Sfmt 6601 C:\DOCS\93477.TXT SAFFAIRS PsN: PHOGAN
29

tion about why money wasn’t sent to creditors, you don’t take those 

calls? 

Mr. POHLMAN. No, sir. We were highly departmentalized and 

customer service was a separate department and we were not encouraged to speak with other departments. 

Senator DAYTON. You are representing yourself as a credit counselor? 

Mr. POHLMAN. Yes, sir. 

Senator DAYTON. You are a credit counselor, but you don’t deal 

with customer service? 

Mr. POHLMAN. Once they are on the plan, it was out of my domain. 

Senator DAYTON. So, what kind of counseling is actually——

Mr. POHLMAN. Performed? 

Senator DAYTON. Yes. 

Mr. POHLMAN. Little to none, sir. 

Senator DAYTON. At all. If somebody actually wants either some 

questions asked or some actual hands-on direct counseling after 

you have enrolled them, then that goes on to someone else. What 

do they call themselves, do you know? They are not credit counselors, are they? 

Mr. POHLMAN. Customer service reps. 

Senator DAYTON. OK. So you have a fake name and you have a 

fake title, in effect. You are a credit counselor, and you are working 

for somebody that is also representing itself to a non-profit, so it 

is really basically faked all the way through until that person has 

been put on the line and started to pay money. 

I guess my time has expired, Mr. Chairman. Thank you. 

Senator COLEMAN. Thank you, Senator Dayton. Senator Pryor. 

OPENING STATEMENT OF SENATOR PRYOR 

Senator PRYOR. Mr. Chairman, thank you, and I am so glad that 

you are taking the lead on this issue. I think it is a very important 

issue for consumers all across America. 

Mr. Pohlman, if I can follow up with some of the questions that 

Senator Dayton was asking, he asked about the credit counselor 

moniker that you had. Did you receive any training or any accreditation as a credit counselor? 

Mr. POHLMAN. No, sir. My training was about one day of reading 

their material. I was on the phone the next day. They are very 

structured scripts. You were not to deviate a single word or syllable 

from the scripts and I just jumped right in. 

Senator PRYOR. Is it fair to say that the training you received 

from your company was more sales training than it was counseling 

training? 

Mr. POHLMAN. Yes, sir. I mean, you must understand, I had 11 

years’ experience in the industry. 

Senator PRYOR. Yes, I want to ask you about that in just one second, but first, I want to ask about something you said in your opening statement about your fake name. 

Mr. POHLMAN. Yes, sir. 

Senator PRYOR. I have been sitting here trying to think of why 

anyone in the credit counseling business would want a fake name 

to be used, even managers having fake names, with the customers 

30

and I am having trouble coming up with a rationale for that. Do 

you know what the rationale is for having a fake name? 

Mr. POHLMAN. No. When my wife also had a lot of trouble with 

that rationale, I can tell you that we went by a first name. It was 

more of an acronym. I mean, if your name was David Wood, they 

may call you Woody or what have you. But anyway, I chose the 

name of Daniel. I was not allowed to be John. I was told that the 

reason why I could not use my name of John was because of computer and customer service reasons. Years ago, we had a John, and 

we don’t want our customers confusing the previous John with the 

current John. 

Senator PRYOR. Yes, but——

Mr. POHLMAN. So I was told that I had to——

Senator PRYOR. I guess the reason that doesn’t hold water with 

me is that the company probably had employed people in the past 

named Daniel, too. That doesn’t make sense. But is that all you 

were told about it at the company? 

Mr. POHLMAN. That was what I was led to believe, sir. 

Senator PRYOR. Now, you had mentioned that you had had, 

what, 11 years’ experience——

Mr. POHLMAN. Yes, sir. 

Senator PRYOR [continuing]. In this type of work before, and you 

had worked for non-profits, as I understand it. 

Mr. POHLMAN. Yes, sir. 

Senator PRYOR. Tell me, in your view, how this is supposed to 

work. How should non-profits service consumers who are having financial and debt problems? How should this work? 

Mr. POHLMAN. Yes, Mr. Pryor. We were spending an hour and a 

half with our clients, and again, this was an NFCC affiliate and 

we were licensed within the State of where we were doing business. 

We had——

Senator PRYOR. I am sorry, licensed in what way? 

Mr. POHLMAN. Licensed, I am sorry, by the State of—in my case, 

the State of Connecticut——

Senator PRYOR. Right. 

Mr. POHLMAN [continuing]. Banking Department. We were licensed debt adjustors. 

Senator PRYOR. OK. And were you licensed at this new company 

where you were working? 

Mr. POHLMAN. I believe they were licensed in the State of Massachusetts, but we did business all across the country. 

Senator PRYOR. OK. Now keep going. I am sorry. 

Mr. POHLMAN. OK. In my 11 years with an NFCC affiliate, we 

provided up to an hour and a half counseling with the client. The 

client was mailed a budget worksheet in which they were to put 

their income, their expenses, who their creditors were. We told 

them—they were then booked for an appointment for an hour and 

a half. They were told to bring a source of income, such as pay 

stubs, such as child support, any legitimate form that income 

comes in. We were looking at budgeting, money management. Perhaps they were having too much money withdrawn from their paycheck. 

There was an intensive hour and a half of budgeting, money 

management. In some cases, the clients were so well educated in 

31

that hour and a half that they could handle things on their own. 

They found out that they were having too much money taken out 

of their paycheck, so the counselor told them to reduce that. Perhaps there are ways of eliminating debt that they weren’t aware 

of. We made referrals to other non-profits, other social service 

agencies like legal aid or aid for the elderly. We considered those 

successful counseling sessions. 

We let them go home and let them talk to their spouse, their significant other, about a debt management plan. We did not push the 

plan during the session. If they chose the plan, fine. They had the 

options. They could go home and think about it. 

Senator PRYOR. When you were working for other non-profits, did 

you feel like you were helping consumers? 

Mr. POHLMAN. Absolutely. 

Senator PRYOR. And when you were working for Cambridge, did 

you feel like you were helping consumers? 

Mr. POHLMAN. No, sir. 

Senator PRYOR. That is all I have, Mr. Chairman. Thank you. 

Senator COLEMAN. Thank you very much, Senator Pryor. 

Just one last thing, if I can do a follow-up, Mr. Allen, just to follow up on a question that you responded to from Senator Levin. He 

was trying to understand what you would have told your customers, again, to understand whether Ms. Troy would have been 

told about that first payment going to the company, and you did 

testify that you told customers that was a voluntary payment, is 

that correct? 

Mr. ALLEN. Yes, sir. 

Senator COLEMAN. Did you also recall in your testimony saying 

that you were reprimanded for doing that by your superiors? 

Mr. ALLEN. Many times. 

Senator LEVIN. Could I just ask one question about these checks? 

Were the monthly checks after your first payment also supposed to 

be cashier’s checks and not personal checks? 

Mr. SCHUCK. Absolutely, they were. 

Senator LEVIN. Is that true with you, too, Ms. Troy? 

Ms. TROY. The first one, I said it was. And then when I picked 

up that the money didn’t go to the creditors, I asked for a refund. 

I wanted to——

Senator LEVIN. Did you send a second check? 

Ms. TROY. I don’t think so. 

Senator LEVIN. Thank you. 

Senator COLEMAN. I want to thank the panel very much. I appreciate your testimony, appreciate you coming forward today. 

Senator COLEMAN. With that, I would then call our second panel 

for today’s hearing. 

I would now like to welcome our second panel to today’s hearing. 

This panel is comprised of representatives of four credit counseling 

agencies. I welcome Chris Viale, General Manager of Cambridge 

Credit Counseling Corporation; Matthew Case, the Chief Operating 

Officer of AmeriDebt; Ms. Cuba Craig, the Chief Executive Officer 

of American Financial Solutions; and finally, James Kroening, the 

Director of FamilyMeans Credit Counseling Service in Stillwater, 

Minnesota. 

I believe, Mr. Kroening, you are an NFCC member? 

32

1The prepared statement and supplemental written submission with attachments of Mr. Viale 

appear in the Appendix on pages 97 and 102 respectively. 

Mr. KROENING. That is correct. 

Senator COLEMAN. I appreciate all of you being with us this 

morning and I look forward to hearing your testimony regarding 

the credit counseling industry. 

Before we begin, pursuant to Rule 6, all witnesses who testify before this Subcommittee are required to be sworn in. I would ask 

you now to please rise and raise your right hand. 

Do you swear that the testimony you are about to give before the 

Subcommittee will be the truth, the whole truth, and nothing but 

the truth, so help you, God? 

Mr. VIALE. I do. 

Mr. CASE. I do. 

Ms. CRAIG. Yes. 

Mr. KROENING. I do. 

Senator COLEMAN. As I indicated to the first panel, we do have 

a timing system. When you see the yellow light come on, it means 

you should conclude your testimony. Your entire written statement 

will be entered into the record. 

With that, we will start with Mr. Viale, followed by Mr. Case, 

Ms. Craig, and finish up with Mr. Kroening. After your further testimony, we will then turn to questions. 

Mr. Viale, you may proceed. 

TESTIMONY OF CHRIS VIALE,1 GENERAL MANAGER, CAMBRIDGE CREDIT COUNSELING CORPORATION, AGAWAM, 

MASSACHUSETTS 

Mr. VIALE. Thank you, Mr. Chairman and Members of the Subcommittee. My name is Chris Viale. I am the Chief Operating Officer of Cambridge Credit Counseling. I want to use my 5 minutes 

to respond to the Subcommittee’s staff report and the first panel 

because I think the public so far has heard a very slanted and biased view of Cambridge Credit Counseling. 

I am proud that we are not a debt mill, that our main focus is 

providing education and financal solutions for the approximately 

two million consumers who have contacted us during our 7 years 

of operation. These are productive, tax-paying, middle-class people 

who are struggling under mountains of consumer debt and our education and debt management plans help them. 

You found one unhappy client, but I wish the Subcommittee had 

spoken to Sister Veronica or the other clients that are here with 

us today. They would love to share their experience and how we 

have helped them at Cambridge. 

So let me first respond to Mr. Schuck and let me show you how 

Cambridge provides full and adequate disclosure at two critical 

points in the decisionmaking process. The first example is our service agreement. As you can see, Section 1 covers services, fees, and 

sign-up instructions. The first payment is our design fee, which is 

equal to 1 month’s payment. Our payment program service fee is 

charged monthly and is equal to 10 percent of the client’s payment 

or $25, whichever is greater. The example box on the board was 

added in July 2002 as a way to disclose this even clearer and it 

33

is very easily summarized at the bottom of the section, right above 

where each consumer has to sign. 

As for Mr. Schuck, although he made seven payments and interest fee concessions were arranged on his accounts, we still refunded 

half his initial fee after he complained. But for the record, I have 

a copy of a service agreement where Mr. Schuck signed. Right 

above the signature is a clear disclosure of the fees we charge. Our 

records also show that Mr. Schuck took 2 weeks, not 1 day or 15 

minutes, after he signed the service agreement to think about joining our program and sending the initial fee in. But again, I am 

sorry his experience is not that of the vast majority of the clients 

that we help. 

The second example of disclosure is our debt management summary. Now, while we have started this about 8 months ago, the information provided is very clear. It illustrates for a consumer exactly how much is going to each creditor, how much the monthly 

service fee is, the fact that the first payments are a fee, what the 

program costs will be, and how much the consumer will save. And 

we have recently added even clearer disclosure that the first payment fee does not go to your creditors. 

Now, I hope for the Q&A that I will get the opportunity to address many of the false statements that Mr. Pohlman has made 

today. 

Now let me respond to the Subcommittee’s staff report, which 

unfortunately is slanted against Cambridge because it conveniently 

leaves out several important facts. The first, the staff report does 

not mention that our fees are regulated and approved by State authorities in four different States and that we undergo annual reviews in Michigan, Connecticut, and Maine. In New York, the 

Banking Department has licensed Cambridge’s sister company to 

conduct its programs and has approved its fee structure under the 

statute that says fees charged to consumers cannot be unreasonable. If the Subcommittee staff believes our fees are ‘‘clearly excessive,’’ then perhaps the staff should investigate the New York State 

Banking Department, which has also approved the similar up-front 

fee structures of other credit counseling companies. 

Second, the staff report does not mention at all the Cambridge 

‘‘Good Payer’’ program. Cambridge is the only company in this industry that actually rebates half of the fair share money that we 

get from creditors to our qualified clients. We have given to over 

75,000 clients a total of more than $14 million back in rebates, and 

here is the data that we submitted to the staff, but for some reason 

it is not mentioned in the report. It is important, because if a client 

successfully completes our program, in almost all cases, they will 

receive more back in rebates than they were charged in the initial 

fee. 

And the third thing, the report makes an unfair and distorted accusations that Cambridge is essentially a money-making machine 

for the Puccios. I can tell you this is not what Cambridge is about. 

We provide real benefits for real people with real value to them. 

Moreover, the vast majority of the 40,000 consumers that contact 

us each month take advantage of access to financial education. 

Only about 12 percent of the consumers that contact us ever join 

34

1The prepared statement of Mr. Case appears in the Appendix on page 127. 

our debt management program. We are not telemarketers in any 

way. 

Doesn’t the fact that tens of thousands of consumers are succeeding under our program mean anything to this Subcommittee? 

I wish the Subcommittee staff had told a balanced story about the 

value that our clients get for the fees they pay. They might have 

done this if they had accepted our invitation to visit the Cambridge 

site and to see firsthand how much we care and how much we help 

consumers. 

Now, I am sorry that my CEO, Mr. Puccio, will not be here today 

to appear on the second panel. He is in the George Washington 

Hospital with symptoms of a stroke, and the Subcommittee has received a letter from the Chairman of the George Washington Neurology Department. 

In conclusion, the Cambridge revolution is all about education, 

empowerment, service, choice, and ultimately financial freedom. 

Congress can share in this mission or kill it, but if you kill it, you 

will be denying consumers the innovative solutions they need in today’s environment. 

At Cambridge, we are committed to the consumer. You can ask 

Sister Veronica or the other Cambridge clients that are here with 

us today if you really want to know how consumers feel about 

Cambridge and their experience. Thank you. 

Senator COLEMAN. Thank you, Mr. Viale. Mr. Case. 

TESTIMONY OF MATTHEW CASE,1 CHIEF OPERATING 

OFFICER, AMERIDEBT, INC., GERMANTOWN, MARYLAND 

Mr. CASE. Thank you, Mr. Chairman and Members of the Subcommittee. I am Matthew Case, Chief Operating Officer of 

AmeriDebt. On behalf of everyone at AmeriDebt, I would like to express our thanks for the opportunity to participate in this hearing 

today. 

AmeriDebt has helped hundreds of thousands of Americans work 

their way out of debt and gain control over their finances. We are 

proud of our record as a pioneer in the modern credit counseling 

industry. At the outset, let me stress the fact that AmeriDebt is actively engaged in attempting to resolve the concerns of consumers 

and government officials. Even though the vast majority of AmeriDebt clients have no complaints with the organization, we are 

working diligently to correct any remaining concern. 

What is more, AmeriDebt took an extraordinary step last November when we decided to stop advertising and stop accepting new clients onto our program. Today, we continue to fulfill our non-profit 

mission by serving approximately 72,000 clients whose accounts 

were active at the time. For these clients, AmeriDebt represents a 

lifeline of fiscal health. It would be tragic if their financial recovery 

plans were jeopardized by hasty or ill-conceived regulatory action. 

AmeriDebt has worked hard to resolve all alleged consumer protection issues. There is no question that we continue to pursue our 

non-profit counseling and consumer education missions. The time 

has come to put these issues behind us and work together with polVerDate 0ct 09 2002 13:25 Aug 17, 2004 Jkt 093477 PO 00000 Frm 00042 Fmt 6633 Sfmt 6601 C:\DOCS\93477.TXT SAFFAIRS PsN: PHOGAN
35

1The prepared statement of Mr. Craig appears in the Appendix on page 142. 

icy makers and the public to deal with the much larger crisis of 

consumer debt. 

Revolving consumer debt has now surpassed three-quarters of a 

trillion dollars. As this crisis depend over the past few years, 

AmeriDebt helped consumers save millions by providing credit 

counseling services and debt management plans to reduce monthly 

payments, lower interest rates, and reduce or eliminate late payment and over-the-limit penalties. 

Correcting financial problems years in the making is no easy 

task. It requires commitment and discipline by consumers and is 

time and labor intensive for credit counselors. As a result, many 

credit counseling agencies follow the advice of an influential report 

published by Visa in 1999. The Visa report suggested that the credit counseling agencies could be more efficient and serve clients better by contracting with private sector companies to perform backoffice administrative tasks. AmeriDebt’s decision to do so accomplished these objectives. 

Some say this approach clashes with the non-profit status of 

credit counseling agencies. Although AmeriDebt was formed before 

I joined the organization, it is critical to realize that our non-profit 

status, like that of nearly every credit counseling agency in the 

country, is in large measure an outgrowth of State laws and creditor mandates. Many States require credit counseling agencies to 

be non-profit and creditors reject debt management plans unless 

the plans come from non-profit organizations. The practical effect 

is to force any credit counseling agency to organize as a non-profit 

entity if it wishes to help consumers in more than one State. 

Historically, credit counseling was provided only by small, local 

counseling agencies. Unfortunately, their services were either unknown or unavailable as a practical matter to a majority of the 

people in need. Even if this credit counseling model made sense 30 

or 40 years ago, there should be no question that the magnitude 

of America’s consumer debt problem far exceeds the capacity of traditional credit counselors to fix. 

AmeriDebt helped pave the way for effective credit counseling on 

a national scale. We hope our knowledge and experience prove 

helpful to the Subcommittee as it considers the future of credit 

counseling. 

Once again, on behalf of AmeriDebt and our 72,000 clients, I 

would like to thank the Subcommittee for this opportunity to testify. 

Senator COLEMAN. Thank you, Mr. Case. Ms. Craig. 

TESTIMONY OF CUBA M. CRAIG,1 CHIEF EXECUTIVE OFFICER, 

AMERICAN FINANCIAL SOLUTIONS, SEATTLE, WASHINGTON 

Ms. CRAIG. Thank you, Mr. Chairman. Members of the Subcommittee, good morning. I am Cuba Craig, President and CEO of 

American Financial Solutions, AFS, a non-profit consumer credit 

counseling agency and a division of North Seattle Community College Foundation in Seattle. We have offices in Seattle and Bremerton, Washington, which is across from the Puget Sound Naval 

Shipyard. 

36

AFS first opened its doors with two full-time employees, including me, in 1999. Since then, we have grown substantially. This 

morning, I would like to tell you what we do and how we support 

ourselves. Then I would like to explain recent changes we have 

made and other changes we have initiated as a result of your investigation. 

AFS provides financial counseling and education to consumers 

and, where appropriate, enrolls them in debt management plans. 

Under such plans, clients agree to make regular payments and 

creditors typically agree to reduce their interest rates. This helps 

creditors to the extent it is an alternative to bankruptcy. 

AFS does not charge up-front or other fees to our clients. Because of the steep decline in fair share payments from creditors, we 

have recently begun to request voluntary contributions from our 

clients. The client is informed that any contribution is voluntary, 

and the client can stop his or her contribution at any time. A client 

who cannot afford to contribute is not asked to do so. The maximum amount we allow a client to contribute is $50 per month. 

Although we always intended to handle all of our original calls 

in-house, in the past, both AFS and counselors at Amerix, a forprofit back-office service provider, handled some of those calls. 

Origination calls are the initial calls from clients seeking credit 

counseling. The Amerix employees who handled the origination 

calls were trained and certified to our AFS standards. The arrangement was to assist us while we built up our workforce. AFS counselors now take all of our origination calls in-house. 

AFS opened its Bremerton facility in 2001 with 12 counselors. 

When we reached 60 counselors, I began exploring options for further expansion, including plans to refurbish a former school and 

double our counseling capacity. Last fall, the foundation board decided not to purchase the new facility and asked for financial plans 

to support the project and cost-effective alternatives. Since then, I 

have been considering other ways to move all of our origination inhouse. 

At midnight on March 14 of this year, we stopped having Amerix 

handle our origination calls. Although handling all origination calls 

in-house has always been our plan, your investigation helped to 

bring this about more quickly than otherwise might have happened. 

Last fall, the North Seattle College Foundation Board, which is 

composed of volunteers, installed a new president and oversight 

committee. Since then, they have been studying our operations to 

ensure that our activities are appropriate and that our management systems are effective and efficient. 

Since the Subcommittee began its investigation, we have stepped 

up our efforts to ensure that AFS meets all applicable requirements. To that end, a review was conducted for AFS and the board 

and recommendations were prepared and considered. Earlier this 

month, the oversight committee made several recommendations to 

me for action. 

First, AFS has stopped outsourcing origination. Any future expansion will be accomplished only by employing AFS counselors inhouse. 

37

1The prepared statement of Mr. Kroening appears in the Appendix on page 150. 

Second, AFS counselors are trained to make all appropriate disclosures. We will review all of our written materials and scripts to 

ensure they reflect that practice. 

Third, AFS will review and attempt to negotiate its contracts 

with Amerix, with particular attention to changing certain provisions, including the method by which payments to Amerix are calculated in favor of a transaction-based or similar payment system, 

and the assist rate provision in the current contract, which is 

counter to AFS philosophy and practice. We also will seek to terminate the FreedomPoint and the FreedomPoint Financial contracts. 

Fourth, we will again seek competitive bids for back-office services. 

Fifth, we will review and revise our debt management plan form 

agreements as appropriate. 

Sixth, we will review all applicable laws and regulations. 

AFS is proud of our well-trained counselors and the service we 

offer to the public. AFS, the foundation board, and the board’s oversight committee are dedicated to ensuring that AFS carries out its 

mission appropriately and effectively and completely within the 

bounds of the law. I am happy to answer any questions you may 

have. 

Senator COLEMAN. Thank you very much, Ms. Craig. 

Ms. CRAIG. You are welcome. 

Senator COLEMAN. Mr. Kroening. 

TESTIMONY OF JAMES KROENING,1 DIRECTOR, FAMILYMEANS 

CONSUMER CREDIT COUNSELING SERVICE, STILLWATER, 

MINNESOTA 

Mr. KROENING. Good morning, Chairman Coleman and distinguished Members of Congress. I am James Kroening, Director of 

Consumer Credit Counseling Service at FamilyMeans, a multiservice agency located in Stillwater, Minnesota, serving not only 

the Twin City metropolitan area but Western Wisconsin and also 

Southeastern Minnesota. I am here today to describe how 

FamilyMeans CCCS, with a department budget of approximately 

$1 million and a program staff of 12, is able to provide affordable, 

effective, and client-centered budget counseling, education, and 

debt management plans to 10,000 people a year while adhering to 

the highest stringent standards of quality. 

To understand our approach, one must first look at our organizational history. FamilyMeans is a mission-based non-profit started 

over 40 years ago by community leaders. Because financial stability 

is a key to a family’s well-being, FamilyMeans has always provided 

financial counseling, mental health counseling, and supportive 

services to give people the tools they need to lead healthy, productive lives. Our multiple services give our clients assistance with underlying issues that may be affecting their lives. 

Our 18-member board of directors provides fiscal oversight, establishes policy, and raises financial support for the agency. They 

serve a maximum of six consecutive years, sign disclosure statements about potential conflicts of interest, and are not related to 

staff members. 

38

FamilyMeans has a long history of being accredited and licensed, 

meeting the rigorous standards set by the National Council on Accreditation of Services for Families and Children and the National 

Foundation for Credit Counseling. Our organization is licensed by 

the States of Minnesota and Wisconsin. Each of these licensing and 

accrediting bodies conducts thorough reviews and audits of business practices and our professional services. The agency also has 

an ongoing quality assurance program to help monitor and improve 

our programs. 

Our community roots, the capable board of directors, and our adherence to the highest standards in the non-profit sector ensure 

that we provide well-run mission-based programs that effectively 

meet community needs. 

FamilyMeans CCCS provides budget counseling, financial education, and debt management programs, which I will refer to as 

DMPs. Budget counseling is the heart of our CCCS program. We 

conduct one-and-a-half-hour comprehensive financial counseling 

sessions because they are effective. A certified financial counselor 

and a client work together to examine their income, their monthly 

expenses, and their debts. Each client leaves with a workable budget and a tailored action plan. 

Many families learn how to manage their money from these sessions and, therefore, do not need a DMP. In fact, the DMP is only 

recommended to clients who need intervention with creditors. We 

put all unsecured debt on the DMP, not just major creditors or 

those who make creditor contributions. 

Equally important, FamilyMeans CCCS offers consumer education each year to approximately 5,000 people. We conduct free 

classes about money management, home buying, credit use at 

schools, colleges, shelters, treatment and recovery programs, community centers, correctional facilities, and other non-profit organizations. This work helps to prevent future financial problems. 

Over the last decade, organizations have entered into the credit 

counseling field who focus on the DMP and its potential revenue 

generation rather than offering comprehensive counseling and education services. The practices of these companies have adversely affected the credit counseling field and tainted the non-profit sector. 

I am appalled to know that consumers receive only a 15-minute 

survey instead of comprehensive counseling and education that can 

lead to lasting change. I am disappointed to hear that some organizations put selected debt on a DMP, charge high set-up fees, guaranteeing income to the company and almost certain failure to the 

consumer. I am saddened that many individuals who could manage 

their own debt are lured into debt management plans with promises of lowered interest rates. I am frustrated that current laws tie 

our hands when people come to us after they have been badly 

served by another organization. I am angry that these same businesses enrich their executives and have for-profit affiliations that 

taint the word non-profit, betraying the spirit and the standards 

we honor. 

Not surprisingly, creditors have responded to these practices by 

reducing their contributions, limiting customer concessions, such as 

lowered interest rates, actions that both hurt consumers and legitimate non-profit agencies like FamilyMeans. For us, creditor conVerDate 0ct 09 2002 13:25 Aug 17, 2004 Jkt 093477 PO 00000 Frm 00046 Fmt 6633 Sfmt 6601 C:\DOCS\93477.TXT SAFFAIRS PsN: PHOGAN
39

tributions have decreased 30 percent in the last 4 years. Our inability to replace this revenue has forced us to close four locations 

and significantly reduce staff over the last 4 years. 

Fortunately, others see the value in the work that we provide. 

We successfully have raised charitable dollars from the United 

Way, foundations, and many individuals to support our counseling 

and our education. With the help of these charitable funders and 

by voluntarily adhering to the standards of not only COA, the 

NFCC and its consumer protection standards, FamilyMeans will 

strive to maintain and restore the public’s trust and continue to 

bring financial stability to families. 

I am hopeful that Congress and the Executive Branch take action to uphold the integrity of the credit counseling field in the face 

of these questionable business practices by recent market entrants 

so that FamilyMeans and other non-profits like ours can continue 

to serve consumers experiencing financial difficulties in the communities throughout the country. 

Senator COLEMAN. Thank you very much, Mr. Kroening. 

Mr. Viale, is it correct that the employees at Cambridge are 

asked to pick out false names? 

Mr. VIALE. If when they start there are other counselors with the 

same first name that are presently working within the group itself, 

we do ask them to pick out a different name for the purpose of 

making it simpler for a client to call in and get to that counselor 

from customer service. 

Senator COLEMAN. Can’t they just call themselves, Mr. Viale? 

Mr. VIALE. They could, but people like to be more formal and call 

it by—more personal and go by their first name. This has recently 

changed—that policy. It has changed several months ago, but that 

was a policy we had in place and it was just to simplify the process 

for the client calling in. 

Senator COLEMAN. There was testimony that there is what one 

would describe as a leader board for top sales for employees who 

are supposedly providing credit counseling services. Is there, in 

fact, what one would describe as a leader board in the Cambridge 

operation? 

Mr. VIALE. There are two separate boards. One board is daily 

productivity, which is monitored by the people around them just so 

we can help motivate the counselors within the floor, and then 

there is the board that illustrates what the counselors achieved as 

far as their goals and what they have done as far as helping consumers. 

Enrollment in debt management plan and also through education. 

Senator COLEMAN. There is a board for education? 

Mr. VIALE. Yes. 

Senator COLEMAN. Could you describe that board? 

Mr. VIALE. The board—well, it is actually—it is not the big monitor board but it is a board that goes up that shows how many consumers the counselors are getting to our education website, 

goodpayer.com, and having them opt in for financial newsletters. 

Senator COLEMAN. So your education is not personal counseling. 

If someone doesn’t enroll in a DMP, do you refer them to a website? 

40

1See Exhibit No. 6 which appears in the Appendix on page 249. 

Mr. VIALE. Correct, and if they enroll, we refer them to our own 

website, correct. 

Senator COLEMAN. If they enroll, aren’t they sent educational 

videotapes and workbooks? 

Mr. VIALE. That is correct. 

Senator COLEMAN. If they don’t enroll, are they sent educational 

videotapes and workbooks? 

Mr. VIALE. No, they are not. The counselors work with each consumer to try and deliver whatever education, the wants and needs 

the best to our ability, and then we work with them to get them 

to our education wellness site, which is goodpayer.com. 

Senator COLEMAN. Are there bonuses that are paid to employees 

for enrolling consumers in debt management plans? 

Mr. VIALE. There are three separate incentives that we have for 

our counselors. Our counselors are hourly employees and they have 

incentives based on the number of qualified consumers they enroll 

in the program, the retention rates of the qualified consumers they 

enroll in the program, and the amount of people that they deliver 

some value of education to. 

Senator COLEMAN. Do you disagree with Mr. Kroening’s assessment that there are many people for whom DMPs aren’t the appropriate path? 

Mr. VIALE. One hundred percent correct. That is why only 12 

percent of the people that enroll in our program, people that call 

in actually enroll in our program. We have——

Senator COLEMAN. But the bonuses you give are for DMPs? 

Mr. VIALE. For qualified clients that do, indeed, need a DMP. 

Our systems, the technology that we have in place and the compliance measures we have in place only allow our counselors to enroll 

consumers that need a DMP plan. 

Senator COLEMAN. Do we have Exhibit 6? 1 It is actually Mr. 

Schuck’s client financial disclosure. On Exhibit 6, it appears that 

his expenses exceed his gross income. Is that the kind of client that 

needs a DMP? 

Mr. VIALE. This person exceeds by $24? 

Senator COLEMAN. Right, gross income, not take-home. Gross income, expenses exceed gross income. 

Mr. VIALE. This document is not familiar to me. I know it has 

Cambridge Credit Counseling Corporation on it——

Senator COLEMAN. Assume just for the purposes of this discussion, assume that this is a document——

Mr. VIALE. No, this would be someone that does not belong in our 

DMP plan. 

Senator COLEMAN. Mr. Kroening, would you disagree with that? 

Mr. KROENING. I would agree, with it. A deficit, we would not put 

a client onto a debt management plan. 

Senator COLEMAN. That is Mr. Schuck’s counseling——

Mr. VIALE. From—correct. 

Senator COLEMAN. The individual who is paying a fee of close to 

$2,000 to enroll in a DMP. 

Mr. VIALE. Right, and that is from our systems of 2001. 

41

1See Exhibit No. 10 which appears in the Appendix on page 254. 

Senator COLEMAN. Exhibit 10 1—Mr. Viale, does this exhibit look 

familiar to you? 

Mr. VIALE. Yes, it does. 

Senator COLEMAN. Is this a letter that you sent to consumers? 

Mr. VIALE. Yes, we do. 

Senator COLEMAN. And this is sent to consumers who have not 

enrolled in a DMP? 

Mr. VIALE. That is correct. 

Senator COLEMAN. And I note it says, ‘‘Second letter. We have no 

record of receiving a response from you. Please review this offer before it expires.’’

Mr. VIALE. Correct. 

Senator COLEMAN. Does it appear you are selling something 

here? Is this an offer? 

Mr. VIALE. Often to try and help people. We want them to call 

in to be able to try and provide them with whether or not they 

need a DMP or whatever type of education we can deliver to them. 

Senator COLEMAN. And again when it comes to education, Mr. 

Kroening talked about an hour-and-a-half session with his clients. 

How long are your sessions? 

Mr. VIALE. For in-house counseling, which his organization does, 

it lasts anywhere from an hour to an hour and a half. Phone counseling, which is a lot different than in-house, can last anywhere 

from 15 minutes to an hour, depending upon the perplex situation 

of the consumer. 

Senator COLEMAN. But the decision to make a DMP often relates 

to that initial phone counseling? 

Mr. VIALE. Not even close, no. It is not until we have done a full 

budget disclosure with the consumer, information has been put into 

our systems, and the systems allow for that consumer to come on 

our program. This is relatively new programming that we have, but 

that is the system that is in place. It has been in place that way 

for 2 years now. 

Senator COLEMAN. Mr. Case, who founded AmeriDebt? 

Mr. CASE. Who founded AmeriDebt? 

Senator COLEMAN. Yes. 

Mr. CASE. To my understanding, it was founded by three directors, Pamela Shuster, Ilze Vipulis, and Jane Conigliaro, I believe. 

Senator COLEMAN. Is it Pukke, or how did you pronounce it? 

Mr. CASE. Pamela Pukke. 

Senator COLEMAN. Pukke. Is she related to Pamela Shuster? 

Mr. CASE. It is the same person. 

Senator COLEMAN. The same person? 

Mr. CASE. Yes. 

Senator COLEMAN. And Pamela Shuster is related to Andris 

Pukke? 

Mr. CASE. Correct. 

Senator COLEMAN. So Andris Pukke, DebtWorks, does the backroom services for AmeriDebt? 

Mr. CASE. They have in the past. It is now The Ballenger Group 

who does the——

42

1See Exhibit No. 15 which appears in the Appendix on page 261. 

Senator COLEMAN. The Ballenger Group. But in the past, under 

AmeriDebt. AmeriDebt would sign the folks up, but everything 

would be processed by——

Mr. CASE. AmeriDebt had processed clients in-house for approximately 2 years before the outsourcing arrangement was done with 

DebtWorks, sir. 

Senator COLEMAN. Was Pamela Pukke ‘‘Pamela Pukke’’ when she 

started AmeriDebt, do you know? 

Mr. CASE. I am sorry? 

Senator COLEMAN. Was Pamela Pukke—you said Pamela Shuster. That is why I was a little confused early on. When AmeriDebt 

was formed and DebtWorks was in the position of processing 

AmeriDebt’s work, was there a relationship between Ms. Pukke 

and Mr. Pukke? 

Mr. CASE. Pamela Shuster had stepped down from the board 

somewhere around August 1999 and the contract was signed with 

DebtWorks in October 1999. 

Senator COLEMAN. How long have you known Mr. Pukke? What 

is your relationship with him? 

Mr. CASE. Long-time family friend. 

Senator COLEMAN. If I may turn to a copy of Exhibit 15, can you 

identify Exhibit 15? 1 Does that look familiar to you? 

Mr. CASE. Yes. 

Senator COLEMAN. And can you tell me what it is? 

Mr. CASE. From my understanding, this is a company meeting 

that the Executive Director Jeff Formulak had, and his notes. 

Senator COLEMAN. And the notes talk about ‘‘We met our goal. We achieved $2,837,033 in contributions. Our goal last month was 

7,500 clients and $2,600,000 in contributions.’’ Does this look like 

a sales meeting? 

Mr. CASE. It is kind of a—to get the morale up around the office, 

to my understanding. 

Senator COLEMAN. But what are you selling? 

Mr. CASE. Well, it also states there, sir, that we did help 9,100 

clients, approximately. 

Senator COLEMAN. Helped enroll them in DMPs. 

Mr. CASE. These are the individuals that were enrolled in DMPs, 

that is correct, sir. 

Senator COLEMAN. It talks about bonus structure. Is there a 

bonus for education? 

Mr. CASE. A bonus is for several things. Again, I did not deal directly with the clients. The managers really handle all the bonuses. 

Senator COLEMAN. Mr. Viale, who do you report to at Cambridge? 

Mr. VIALE. I report to John Puccio. 

Senator COLEMAN. John Puccio, he is the CEO? 

Mr. VIALE. Correct. 

Senator COLEMAN. Is there anyone else between you and Mr. 

Puccio? 

Mr. VIALE. No, there is not. 

Senator COLEMAN. Do you know how much Mr. Puccio earns 

each year from Cambridge Credit? 

43

Mr. VIALE. Yes, I do. 

Senator COLEMAN. Can you tell us what that is, what is his salary? 

Mr. VIALE. Six-hundred-and-twenty-four thousand, I think, was 

his salary last year. 

Senator COLEMAN. And your salary in this non-profit is how 

much? 

Mr. VIALE. It is right around $400,000. 

Senator COLEMAN. Ms. Craig, by the way, I do want to thank you 

for the initiatives that American Financial has made. 

My time is going to be up, but I did want to follow up. Mr. 

Kroening and Ms. Craig, I want to thank you for the changes, and 

I am running out of time here. Mr. Kroening, I appreciate what the 

NFCC is doing and I think one of the great difficulties in this hearing is that we are grouping folks together. 

Clearly, there is a difference in non-profits, and that may be one 

of the issues here. People buying something, it is a non-profit. It 

may be that you need for-profit agencies and folks should get out 

there and have that and they can make choices. But what you have 

got here is non-profits that do certain things with the idea of not 

making bonuses and not making money and not making $600,000 

and $400,000 a year, and you have for-profits that are acting as 

non-profits. I think that is problematic. 

Senator Levin. 

Senator LEVIN. Thank you, Mr. Chairman. 

Mr. Viale, you are presumably telling people that you are selling 

these management plans to how much their initial fee is. That is 

the theory of it, is that correct, on the telephone? 

Mr. VIALE. I didn’t understand the question. I am sorry. 

Senator LEVIN. What is the initial fee? 

Mr. VIALE. The first payment they make to our company is 

the——

Senator LEVIN. Regardless of that amount? 

Mr. VIALE. Regardless of that amount, correct. About 20 percent 

of the consumers that join our program get a reduced initial fee 

due to hardship. 

Senator LEVIN. So regardless of the amount of their debt, whether it is a small amount or a large amount, their initial fee is 10 

percent of that debt? 

Mr. VIALE. No, it is not 10 percent. It is the monthly payment 

that we develop, or our computer systems develop based on creditor 

guidelines to handle the debt for them. 

Senator LEVIN. What is the amount of the initial fee, set-up fee? 

Mr. VIALE. Whatever their monthly payment is going to be to 

satisfy the creditors and the program. 

Senator LEVIN. I am sorry? 

Mr. VIALE. Whatever their monthly payment needs to be to satisfy the program. So, for instance——

Senator LEVIN. So the first monthly payment is the fee. 

Mr. VIALE. That is correct. 

Senator LEVIN. It all goes to you. 

Mr. VIALE. That is correct. 

Senator LEVIN. And no matter what the size of that fee is, you 

keep it? 

44

Mr. VIALE. Correct. 

Senator LEVIN. Shouldn’t there be a relationship between the fee 

you get to set up a management plan and the services that you 

render? 

Mr. VIALE. There should be a relationship to the savings and the 

rebates available for the consumer. It is all relative to the size of 

the debt the consumer has, an example being if somebody owes——

Senator LEVIN. Shouldn’t it relate to the services that you 

render? 

Mr. VIALE. No, it should relate to the savings the consumer can 

receive, the rebates they are able to receive through the program, 

and also, it should also relate to the fact that we have our fees reviewed and licensed in separate States, so they are deemed reasonable. 

Senator LEVIN. All right. Does that fee directly relate to what 

they are going to get in the future? 

Mr. VIALE. It directly relates to their savings in interest rate reductions. It directly relates to the amount of rebates they can get 

back. 

Senator LEVIN. Not can get back, but do get back. 

Mr. VIALE. That they can get back, qualified——

Senator LEVIN. What if they don’t get back any rebate? 

Mr. VIALE. They haven’t made their payments on time. Some of 

that is not in our control. Our system is not immune to the consumer following through with it. 

Senator LEVIN. But you keep that first monthly fee regardless of 

what comes subsequently in terms of benefits to that consumer, is 

that correct? 

Mr. VIALE. That is correct. The consumer understands that when 

they come into the plan. It is disclosed very clearly to them. 

Senator LEVIN. Apparently, some consumers don’t understand 

that. 

Mr. VIALE. We disclose it at two very critical points. I can’t see 

any other way to disclose it. Plus, our counselors reinforce it. 

Senator LEVIN. You have that in fairly small print, do you not? 

Mr. VIALE. No. It is boxed out. It is right above where they have 

to sign. 

Senator LEVIN. Because apparently there were quite a few consumers that don’t understand that their first fee was—just read 

that to us again. 

Mr. VIALE. It says, ‘‘Payment design fee, proposed monthly payment, one time only.’’ Below that, it is ‘‘Payment program service 

fee, 10 percent of each payment made to Cambridge or $25, whichever is greater,’’ and then there is an example box. ‘‘This is not a 

finance charge or an interest rate. This is not your proposed 

monthly payment. This is only an example. Proposed monthly payment, $300, 10 percent, $30, dispersed to creditors, $270. This is 

only an example.’’

Senator LEVIN. I see. And where does it say that you are keeping 

the entire fee? 

Mr. VIALE. It says it right there, ‘‘Payment design fee, proposed 

monthly payment, one time only.’’ Plus, it says it all throughout——

45

Senator LEVIN. You are talking very fast. Payment—this is a program design fee? 

Mr. VIALE. That is correct. 

Senator LEVIN. Where does that say that you are keeping all the 

money? 

Mr. VIALE. It says it throughout the text and it says it here. 

Senator LEVIN. No, I know the text, which no one can read. I am 

talking about in the box you pointed to. Where does it say you are 

keeping all the fee? Program design fee are not words which jump 

out to the average reader as being, none of this goes to your creditors. 

Mr. VIALE. Well, we have it here. It is—I mean, we feel that is 

clear enough. We feel this is way above what any other company 

does as far as disclosure, plus the consumer receives this before 

they join the program. I think we have to understand that once 

they sign the service agreement, they are not obligated to our program. They are not signing up. They receive this. It is very clear 

exactly what we are charging them. The counselors go through this 

line by line. 

Senator LEVIN. Your counselors on the telephone go through your 

customers line by line with that debt management plan summary 

after it is received? 

Mr. VIALE. Correct. 

Senator LEVIN. So after that is received by your customers, they 

call back and then they go through with Mr. Daniel, or whoever it 

is, if they can find them, the——

Mr. VIALE. It is not——

Senator LEVIN. It is not hard to find your folks? 

Mr. VIALE. No, it is not hard to find us. 

Senator LEVIN. All right. They go through it line by line, OK. 

And your first payment fee there——

Mr. VIALE. Line by line. Each——

Senator LEVIN. No, just point out the first payment fee, if you 

would. 

Mr. VIALE. ‘‘Payment design fee. This payment is not paid to your creditors,’’ $374. 

Senator LEVIN. All right. 

Mr. VIALE. Total estimated monthly fees——

Senator LEVIN. So on that right there, not where they sign but 

something which is sent to them which looks like this is where the 

words, ‘‘This payment is not paid to your creditors—’’

Mr. VIALE. That is relatively new, but yes, that is where it is. 

Senator LEVIN. Relatively new? How new? 

Mr. VIALE. Several weeks as far as just that—in parentheses. 

Senator LEVIN. In parentheses? You didn’t even have the parentheses year after year where people signed their name. It obviously 

wasn’t very clear because now, 3 weeks ago, you add that. 

Mr. VIALE. The payment design fee has been there all along. 

Senator LEVIN. I know it has been——

Mr. VIALE. It is very clear. 

Senator LEVIN [continuing]. But that is not intelligible to people, 

and so you finally, a few weeks before this hearing, add these 

words, not where they sign, not where they sign yet. That is still 

not added, is it? Where is it? 

46

Mr. VIALE. Is what? 

Senator LEVIN. Go back to where they sign their name, where 

you say everything is so clear, where there are no parentheses. See 

those words, ‘‘Payment design fee’’——

Mr. VIALE. Yes. 

Senator LEVIN [continuing]. Right where they sign? 

Mr. VIALE. Yes. 

Senator LEVIN. That is not intelligible. That doesn’t tell people 

none of that goes to their creditors. So a few weeks ago, you put 

on this other exhibit, ‘‘None of this goes to your creditors.’’ Why 

don’t you put that in that box where they are signing their name, 

‘‘None of this goes to your creditors’’? 

Mr. VIALE. These service agreements have been approved by several different banking departments and the States we are licensed 

in. 

Senator LEVIN. That is fine. 

Mr. VIALE. We are trying to do our best with full disclosure. The 

counselors go through this——

Senator LEVIN. Why don’t you put the parentheses in that box 

where people sign their names? 

Mr. VIALE. We can do that. 

Senator LEVIN. Well, it is obviously clearer, isn’t it, to say none 

of this goes to your creditors? 

Mr. VIALE. Yes. That is why we have put it here. 

Senator LEVIN. A few weeks ago. 

Mr. VIALE. Correct, but the payment design fee and the counselors through their presentations, if you want to pull this up—can 

I pull up the presentations? 

Senator LEVIN. No, I think——

Mr. VIALE [continuing]. Where we say——

Senator LEVIN. I think I would rather focus on my questions. 

Mr. VIALE. OK, sir. 

Senator LEVIN. Let me tell you, that is not disclosure. I am just 

going to make a statement here. You have got your statement that 

it is, but it is obviously not disclosure, payment design fee, unless 

you tell people where they sign their name and over the telephone 

that none of that is going to go to your creditors. You have now 

done this on a form which goes out afterwards, and that may or 

may not help. It is a little better than what you have been doing 

all these years. 

Let me just ask one more question before my time runs out. You 

have got a relationship—let me be clear. The non-profit has a relationship with the for-profit, is that correct? The for-profit does the 

processing services, the so-called back-room services for the not-forprofit? 

Mr. VIALE. Part of the family of companies is a for-profit company, correct, that does back-end support. 

Senator LEVIN. And the people who control the non-profit also 

control the for-profit, is that fair to say? 

Mr. VIALE. That is fair to say. 

Senator LEVIN. And those folks, then, are negotiating with themselves in terms of what those processing fees are, is that correct? 

Mr. VIALE. No. Those contracts—I am not 100 percent familiar 

with this, but those contracts are evaluated at fair market value. 

47

Senator LEVIN. But they seem to be very different from all of the 

contracts which are worked out by the associations, for instance, 

the National Foundation for Credit Counseling and the AICCCA. 

They have very different fees than you do. So when you say fair 

market value, there is no place you look in a manual to find fair 

market value, is there? 

Mr. VIALE. The back-end support systems we have are not within 

the industry anywhere. We have looked closely with other companies to gauge what fair market value would be. 

Senator LEVIN. But in terms of setting that fee, it is set by the 

people who control the non-profit with the people who own the forprofit, is that correct? 

Mr. VIALE. I didn’t understand the question, sir. 

Senator LEVIN. Who negotiates that fee? Isn’t it the non-profit 

with the profit-making company? 

Mr. VIALE. Oh, I don’t know. 

Senator LEVIN. How is the fee set? Who sets it? 

Mr. VIALE. I don’t know. That is not my line of expertise. My responsibilities are day-to-day operations of our family of companies. 

Senator LEVIN. Does anyone outside of the two families of the 

companies set it up or is it set up within the family of companies 

as to what that fee is? 

Mr. VIALE. Well, this is reviewed by two separate accounting 

firms——

Senator LEVIN. No, I know about that, but who sets the fee? Is 

it set up within the family of companies? 

Mr. VIALE. I am not sure. I think it is reviewed and it is proposed, but I am not sure how it gets approved. 

Senator LEVIN. Would it surprise you to know that it is $25 or 

$30 that compares to $1 to $2 for each of these plans per month 

by other non-profit companies, that it is 20 times higher than other 

non-profits? 

Mr. VIALE. It is surprising, because there are other bids I have seen for $13, $15, and $18. 

Senator LEVIN. Do you put this out for bids? 

Mr. VIALE. That, I don’t know. 

Senator LEVIN. If it were—I thought you said a minute ago——

Mr. VIALE. I said I have seen bids from other organizations. 

Senator LEVIN. No, I know that, but before that, didn’t you say 

that this fee was negotiated between the profit——

Mr. VIALE. No. 

Senator LEVIN [continuing]. And the non-profit? 

Mr. VIALE. No, I did not say—I don’t have the answer to that. 

Senator LEVIN. You just don’t know where these fees are set, or 

how these fees are set? 

Mr. VIALE. No. 

Senator LEVIN. The larger the fee, the more money would go to 

the profit-making corporation, is that fair to say? 

Mr. VIALE. It seems fair to say. 

Senator LEVIN. Yes. And so the larger the fee, the more money 

would get into a company which then is not regulated in terms of 

profit by the IRS, is that correct? 

Mr. VIALE. I don’t know. I am not an accountant. I don’t know 

those answers. 

48

Senator COLEMAN. Thank you, Senator Levin. Senator Pryor. 

Senator PRYOR. Thank you, Mr. Chairman. 

First, let me say to Mr. Case that I feel like your answer a few 

moments ago when you talked about Pamela Shuster was not 

forthcoming. I feel like you were deliberately misleading the Subcommittee by not giving her married name, and I want to thank 

the Chairman for drawing that out because I wouldn’t have picked 

up on that. 

Mr. CASE. I am sorry. I didn’t mean to do that. I did not mean 

to do that. We refer to her, because back in the time when she was 

affiliated with the company, she was Pamela Shuster. 

Senator PRYOR. Well, I just want to thank the Chairman for connecting the dots on that because I think that is a significant——

Mr. CASE. I apologize. 

Senator PRYOR [continuing]. Fact that you left out. 

If I may, is your name pronounced ‘‘Vile’’? ‘‘Vi-al’’? 

Mr. VIALE. ‘‘Vi-al-ee.’’

Senator PRYOR. ‘‘Vi-al-ee.’’

Mr. VIALE. Yes. 

Senator PRYOR. Mr. Viale, let me focus with you just for a few 

moments. You mentioned in your opening statement that you felt 

like some of the early witnesses had unfairly painted your company 

as a money-making machine for the two founders. And again, I am 

sorry, I am not sure of the pronunciation, but ‘‘Pu-chee’’? 

Mr. VIALE. ‘‘Pu-chee-oh.’’

Senator PRYOR. ‘‘Pu-chee-oh.’’ As I understand your testimony, he made $624,000 in one year. His wife made $624,000 in one year. 

Mr. VIALE. His brother. 

Senator PRYOR. His brother. And in addition, he made an additional $600,000 from related organizations. Is that——

Mr. VIALE. That, I don’t know. 

Senator PRYOR. In 2002, did he sell the company? 

Mr. VIALE. No. There was no sale of the company in 2002. There 

was a sale of a company in 1996 or 1997 to the non-profit when 

we moved to Massachusetts. 

Senator PRYOR. OK. And then, as I understand it, your salary is $400,000 or more? 

Mr. VIALE. Right around there, correct. 

Senator PRYOR. And do you have any incentives or any bonuses on top of that $400,000? 

Mr. VIALE. No. 

Senator PRYOR. Now, if I can, I would like to ask Mr. Kroening 

down here on this end of the table, what is your salary at your nonprofit? 

Mr. KROENING. My annual salary is $60,000. 

Senator PRYOR. Thank you. Mr. Viale, I believe you said that you 

have about 40,000 customers or clients that call in every month, is 

that the figure you said? 

Mr. VIALE. New callers that call in each month, correct. 

Senator PRYOR. But you only sign up, what, about 12 percent of 

those? 

Mr. VIALE. That is correct. 

Senator PRYOR. As I understood your testimony, that is what you 

said. So that is about 4,800 a month. Is my math right? 

49

Mr. VIALE. Something right there, yes. 

Senator PRYOR. What is your average fee that you charge your 

clients? 

Mr. VIALE. Three-hundred-and-eighty dollars is right around the 

average initial fee of a consumer that joins a program. 

Senator PRYOR. OK. Now, you said $385? 

Mr. VIALE. It is right around $380. It fluctuates, but around $380

Senator PRYOR. And you said something there that I think is important, and that is your $385 for the initial fee. 

Mr. VIALE. Yes. 

Senator PRYOR. What is the total fees that they are charged during their relationship with you? 

Mr. VIALE. It would be $38 per month from the second month 

thereafter, and the plan can range anywhere from 4 to 5 years, or 

4 to 51⁄2 years. 

Senator PRYOR. OK. Now, how are these fees calculated? 

Mr. VIALE. It is based on the service agreement. It is 10 percent 

of their monthly payment, and whatever their payment needs to be 

on the program is the initial fee. That is the first payment that is 

our fee. 

Senator PRYOR. OK. And these are averages. They are not the 

same for everybody. They all fluctuate depending on what the customer’s needs are. 

Mr. VIALE. The payment size—well, it fluctuates for each consumer, yes, correct. 

Senator PRYOR. OK. What percentage of your clients stay with 

the program through the duration? 

Mr. VIALE. We have a little over a 30 percent completion rate. 

Senator PRYOR. OK. And is there any penalty for dropping out? 

Mr. VIALE. No penalty. 

Senator PRYOR. Now, of the clients that you have, how many—

what percentage, I think that is the best way to handle this, what 

percentage actually enroll in a debt management plan of the clients 

you have that have signed up with you? Do all of them enroll in 

debt management? 

Mr. VIALE. No. Twelve percent of the people that call us enroll 

in the debt management plan. 

Senator PRYOR. I understand that. We have already covered that. 

Mr. VIALE. Right. 

Senator PRYOR. But I am asking, of those 12 percent, how many 

sign up in the debt management, all of them? 

Mr. VIALE. That is correct. The other 88 percent is counseled to 

our best ability with whatever education they need. 

Senator PRYOR. OK. So you are going to try to tell the Subcommittee today that those 88 percent do receive some services 

from you? 

Mr. VIALE. We try as hard as we can to deliver services to those 

consumers. 

Senator PRYOR. But everybody that ‘‘signs up,’’ they are moved 

into a debt management plan? 

Mr. VIALE. That is correct. 

Senator PRYOR. Now, Mr. Kroening, let me ask you, based on 

your experience, you have heard a lot about debt management 

50

plans today. Do they work for everybody or how is this consistent—

is this consistent with your experience and what you do? 

Mr. KROENING. With our experience, again, we will only put folks 

on plans when it is necessary and needed by the family. Again, in 

our case, we don’t talk about how many people contact us. We talk 

about the folks that we actually counsel. In this case, approximately 30 percent of the folks that we counsel will go onto a debt 

management plan. 

Senator PRYOR. And your counseling is an hour and a half, 

whereas I believe the testimony is their’s may be about 15 minutes 

on that initial phone call? 

Mr. KROENING. Yes. Our counseling will be an hour and a half, 

sometimes as much as 2 hours. 

Senator PRYOR. Mr. Chairman, I have one last question. I know 

I am almost out of time, but again, it is for Mr. Viale, and that is 

you are operating under the label non-profit. Why did you choose 

to operate under a non-profit label? 

Mr. VIALE. Well, I don’t have a specific answer for that, but I 

know the industry forces us to be a non-profit. 

Senator PRYOR. I don’t think that is true. I think you can——

Mr. VIALE. Well, the creditors only endorse, for the most part, a 

non-profit status to grant benefits to the consumer. 

Senator PRYOR. So it is to your benefit to work with creditors to 

be a non-profit, but also, wouldn’t you agree with me that it is to 

your benefit to work with your clients to call yourself a non-profit 

because it gives them an assurance that there is a credibility with 

your company, would you agree with that? 

Mr. VIALE. No, I wouldn’t agree with that. If we were for-profit 

or non-profit, we would put the same energy into working with 

each consumer we are talking to. 

Senator PRYOR. I am not talking about the energy you put in. I 

am talking about how consumers feel toward a for-profit company 

versus a non-profit organization. Would you agree with me that 

they feel better about going to a debt counselor or a debt agency 

that is a non-profit, or would you not agree with that? 

Mr. VIALE. I don’t know. I don’t know that to be true either way. 

Senator PRYOR. That is all I have, Mr. Chairman. Thank you. 

Senator COLEMAN. Thank you, Senator Pryor. Senator Dayton. 

Senator DAYTON. Thank you, Mr. Chairman. 

So the purpose of your enterprise is ostensibly to provide the client with a reduction in his or her payments based on your negotiation with the creditors? How is that reduction documented? How 

does the client know that he or she is getting value from what you 

are charging? 

Mr. VIALE. We fax them our service agreement. They sign the 

service agreement, so they understand the terms of the service 

agreement. We provide them with a budget analysis. We go over 

their bills in detail. Then we provide them with a debt management plan summary, which is here, and it goes over exactly each 

creditor we are handling, how much has to go to each creditor, how 

long it will take, what it would cost them on their own based on 

18 percent interest, and what it would cost through us and their 

savings, as well as the fees and the rebates they can receive. 

51

Senator DAYTON. Is that 18 percent what is actually being 

charged at that time? 

Mr. VIALE. It is an underestimate. Most consumers we are talking to are being charged more than 18 percent interest. 

Senator DAYTON. But you are representing this as their savings. 

Is this based on actual interest rates or are you making assumptions here? 

Mr. VIALE. Well, they are not assumptions. They are not based 

on the actual information the consumer has. We don’t have that 

available to us. 

Senator DAYTON. Well, you are asking the consumer to provide 

you with information. Why wouldn’t you obtain that information? 

Mr. VIALE. We are not able——

Senator DAYTON. How do you assess whether the client is going 

to receive a benefit if you don’t know what the client is presently 

paying? 

Mr. VIALE. We don’t know exactly what their interest rates are 

with each account. That is impossible for us to know. 

Senator DAYTON. You are setting up a management fee, which in 

the case of Mr. Schuck was $2,000. Wouldn’t that be an appropriate part of the service, then, to make an actual determination 

rather than just plugging in some generic assumptions? 

Mr. VIALE. There is no generic assumptions. We know what 

the——

Senator DAYTON. What are the interest rates based on? 

Mr. VIALE. The interest rates are based on creditor guidelines. 

We know what they will do upon acceptance of the proposals prior 

to our client joining our program. So there is no guesswork involved in the plan that we are setting up for them. 

Senator DAYTON. Why aren’t you representing to them in the 

plan the actual cost of their present situation and then showing 

them what reductions you are able to gain for them? 

Mr. VIALE. Because it is creditor-specific. There are sliding scales 

for each creditor. It is impossible for us to determine exact figures 

for the consumer. 

Senator DAYTON. But don’t you have the exact figures based on 

that client’s present situation? 

Mr. VIALE. It is impossible. 

Senator DAYTON. What is impossible? 

Mr. VIALE. Well, I will give you an example. 

Senator DAYTON. If I come to you and I have six credit cards and 

I am overdue on whatever they are, I have six interest rates that 

are being charged on my six accounts—what is complicated about 

that? 

Mr. VIALE. Well, we don’t know what certain creditors like Discover, MBNA, or other creditors are going to do with the interest 

rate concessions. 

Senator DAYTON. You are negotiating with each creditor a reduction part of this management fee that you are collecting up front? 

Mr. VIALE. No. There is not a negotiation process. They are going 

to evaluate the proposal we send in based on criteria of the client, 

their client. Then they are going to, in turn, set an interest rate 

for that particular account. 

52

Senator DAYTON. These savings, then, are just based on a set of 

fictitious assumptions? They are not based on actual negotiations? 

Mr. VIALE. We don’t negotiate with the creditors. 

Senator DAYTON. They are not based on an actual fact of what 

is going to be accomplished on their behalf? 

Mr. VIALE. We have general terms for each creditor. Some 

vary——

Senator DAYTON. I am not talking about general terms. You are charging $2,000 for a computer printout and representing that as 

actual savings. If I am taking the time, which I would hope I 

would, to be reading this and trying to make an assessment, I am 

relying on your assertions that this is what I am going to save so 

I can understand whether I am getting an appropriate benefit or 

not, and you are saying that they are not based on actual facts, 

they are based on your assumptions or some generic numbers that 

you plug into a computer program. 

Mr. VIALE. It is not——

Senator DAYTON. Why is that worth $2,000 to me? 

Mr. VIALE. Because that is what the amount of the—that particular client, that is what you owe them. That is what it is going 

to take to pay back the debt through us. 

Senator DAYTON. No, that is what you are charging. You are 

charging me an up-front management fee, which in Mr. Schuck’s 

case is $2,000. I am just using that as an approximation. I don’t 

know if that is high or low for your average customer——

Mr. VIALE. It is very high. 

Senator DAYTON. High, OK. So whatever it is, $1,500—what is 

the average management fee? 

Mr. VIALE. Three-hundred-and-eighty dollars. Three percent of 

our clients have payments over $1,000. 

Senator DAYTON. I am talking about the first month, the upfront. 

Mr. VIALE. Three-hundred-and-eighty dollars is the average. 

Senator DAYTON. Does that include the 10 percent? 

Mr. VIALE. Correct. 

Senator DAYTON. All right. So for that, what am I getting? I am 

getting this computer printout? 

Mr. VIALE. You are getting our systems of generating to our best 

ability what the estimated savings will be for each client that 

comes in to us. 

Senator DAYTON. What is that document being represented as? 

What is the title of that, not the one in front of you now but the 

one that you send out there? 

Mr. VIALE. It is called the Debt Management Plan Summary, A 

Pro Forma Statement. 

Senator DAYTON. OK. Would I have any reason not to believe 

that is reflective of my situation and that you made that determination? I mean, what other kind of service are you providing except for an effort to reduce my overall payments? 

Mr. VIALE. This is only part of what we do. I mean, this is 

only——

Senator DAYTON. What else do you do? 

Mr. VIALE [continuing]. Ten to 20 percent of what we do. The 

rest is all education. 

53

Senator DAYTON. On a website? 

Mr. VIALE. No, not on the website. The counselors interact with 

the consumers and do our best to deliver whatever education they 

want and they need. What the Subcommittee doesn’t understand——

Senator DAYTON. How can your counselors provide information if 

they don’t have the facts? How can they counsel without the facts? 

Mr. VIALE. We do have——

Senator DAYTON. Let me just ask one other question, Mr. Chairman. I am sorry. This fair, what do you call it, the fair share plan 

for the rebate——

Mr. VIALE. Good payer program. 

Senator DAYTON [continuing]. The bonus you are paying——

Mr. VIALE. Yes. 

Senator DAYTON. Based on the figures you have provided to your 

almost 76,000 clients, the $14 million, that averages out to $185 

per client. 

Mr. VIALE. A hundred-and-eighty-two dollars, correct. 

Senator DAYTON. So that is less than—and you say the average 

up-front payment is $385? 

Mr. VIALE. That is correct. 

Senator DAYTON. You are giving them back a fraction of what 

they are paying you, but more importantly, I guess my question is, 

if twice that is the total value of the savings that you are getting 

from the creditors, again, what value are you providing to this client for all that you are charging? 

Mr. VIALE. Some of those 10,000, and you have a payment of 

$300, we will use $300 as our example, they are going to save 

roughly between maybe $100 to $150 in interest charges every 

month by being on our program. 

Senator DAYTON. How do you know that? You don’t have that information. 

Mr. VIALE. We have——

Senator DAYTON. You just said it is impossible to get that information. 

Mr. VIALE. It is impossible to get accurate information. The information we are providing is very close to accurate. 

Senator DAYTON. How is it impossible to get accurate information on what is actually occurring out there among your clients? 

Mr. VIALE. You should talk to the banks about that. 

Senator DAYTON. Well, no, I don’t talk to the banks. It is what 

you——

Mr. VIALE. It is not——

Senator DAYTON. What do you——

Mr. VIALE. The creditor——

Senator DAYTON. I get a monthly statement. I get information on 

what the current interest rate is. But at the end of all my good behavior, I am getting $185 back as a bonus. The other $185 you are 

saving, that is the total value of the savings, $370, that on average 

you have achieved through interest reductions from the creditors. 

Mr. VIALE. That is not true. 

Senator DAYTON. I am just using the numbers you provided. 

Mr. VIALE. That is not true. I mean——

54

Senator DAYTON. What is true, then? What are you getting for 

these costs? 

Mr. VIALE. Extreme value we are delivering to people who need 

a debt management program. 

Senator DAYTON. No. Quantify it. What are you getting for them? 

Mr. VIALE. We are getting reduced interest rates so they can get 

out of debt in a reasonable time frame. 

Senator DAYTON. So they are getting $370 worth of reduced interest rates? 

Mr. VIALE. On a monthly basis, they are getting——

Senator DAYTON. No, not monthly, that is the total. The total re- bate is $185. 

Mr. VIALE. No, no——

Senator DAYTON. It is half of the interest that you have saved. 

So the total value of the interest you have saved—well, don’t shake 

your head. Then tell me what the facts are. 

Mr. VIALE. This is rebates. This is fair share money the creditor 

sends to an organization. 

Senator DAYTON. And they get half of it and you get half. 

Mr. VIALE. Right. That is not interest rate reductions. That is not 

savings on the plan. This is just fair share, that we give half back 

to our consumers. No one does that. Interest rate concessions, we 

all get. We all save the client the same type of money from a 

monthly basis from each creditor. It is all standard. There is no difference in what we do. 

Senator DAYTON. But again, what are you saving them? 

Mr. VIALE. Tens of thousands of dollars. Someone who owes 

$10,000——

Senator DAYTON. How do I know that if I am a customer? How 

do I know what you are saving me? 

Mr. VIALE. It is our expertise, and everything we have in our system is all computerized based on creditor guidelines. There is no 

guesswork in what we do to a degree. We can’t provide an exact 

detailed report, and nobody can. 

Senator DAYTON. Thank you, Mr. Chairman——

Senator COLEMAN. Thank you, Senator Dayton. 

Senator DAYTON [continuing]. For your indulgence. 

Senator COLEMAN. I want to just follow up on a couple things. 

Fair share, you talked about fair share. The number one creditor 

for Cambridge is Citibank, is that correct? 

Mr. VIALE. I am not exactly sure. It is one of the top ones. 

Senator COLEMAN. The top ones. Do you know if Citibank does 

anything with fair share, provides any fair share rebate? 

Mr. VIALE. Provides any fair share—I don’t understand. 

Senator COLEMAN. Isn’t it true that many of your top creditors 

no longer participate in fair share or else only rebate a very small 

percentage? 

Mr. VIALE. We are down——

Senator COLEMAN. Are you aware of that? 

Mr. VIALE. I am aware of it. We are down to a little bit less than 

5 percent fair share. 

Senator COLEMAN. Your top creditor, Citibank, do you know if 

they provide any fair share? 

Mr. VIALE. Yes, they do, to us. 

55

Senator COLEMAN. And what percentage. 

Mr. VIALE. Yes. Well, 9 percent is the fair share. I think it is 

nine. It is eight——

Senator COLEMAN. Citibank is giving you back 9 percent? 

Mr. VIALE. It is 8 or 9 percent based on—they are still coming 

out with their new policy of their grants and that hasn’t been released to the community yet. 

Senator COLEMAN. Bank One, one of your top three, what is their 

fair share? 

Mr. VIALE. That might be zero right now. 

Senator COLEMAN. It might be zero. And MBNA, your number 

two credit group, what is their fair share? 

Mr. VIALE. They are at zero right now. 

Senator COLEMAN. OK. So your top creditors, and I want to turn 

to you, Mr. Kroening, because you are impacted by this, aren’t you? 

Mr. KROENING. Yes. 

Senator COLEMAN. Is it fair to say that the top creditors today 

are not participating in fair share or have substantially cut their 

fair share because of the fact that so much of this revenue is being 

generated now through either for-profits that are making a lot of 

profits or for-profits that are benefitting from what the non-profits 

are doing? 

Mr. KROENING. Yes, Mr. Chairman. My belief is that we have 

seen a major decrease in the creditor support for our type of counseling and debt management work that we do, related specifically 

to the number of new entrants and the number of folks that they 

are putting on plans. And specifically, I believe it is related to the 

fact that many people are being put into debt management plans 

that simply do not need it and creditors have seen their line item 

expense go out the roof with this. What they do is cut across the 

board. So this has drastically affected us. Our organization has a 

budget of just around $1 million. Over the last 4 years, these cuts 

have meant about $250,000 in less revenue for us. 

Senator COLEMAN. The last area of inquiry, I want to clear up 

this thing about education so we are very clear. There is an initial 

call to a customer. Mr. Schuck is a customer. That call lasts approximately how long, Mr. Viale? 

Mr. VIALE. It can last anywhere from 5 to 15, 20 minutes, the 

first call. 

Senator COLEMAN. Let me back up. Is there any face-to-face education you have with any of your consumers? 

Mr. VIALE. One hundred percent. If they live in the area, they 

come in for face-to-face counseling. 

Senator COLEMAN. What percentage of your customers come in 

for face-to-face counseling? 

Mr. VIALE. People that live in the area, almost 100 percent of 

them. 

Senator COLEMAN. What percent of the total——

Mr. VIALE. We are national. We don’t have a facility in every 

State and every county. 

Senator COLEMAN. So what percent of your total customers get 

face-to-face counseling? 

56

Mr. VIALE. Approximately 10 to 20 a day get face-to-face counseling, so I don’t know what that would relate to. I have never done 

the numbers up. 

Senator COLEMAN. The education—so I am making it very clear, 

if you don’t enroll in a debt management plan, you get referred to 

a website, is that correct? 

Mr. VIALE. That is correct. 

Senator COLEMAN. And if you do enroll in a debt management 

plan, you get a workbook and a videotape, is that correct? 

Mr. VIALE. You get a two-and-a-half-hour video series and a 

workbook plus the website plus newsletters and the education center along with the counselor. 

Senator COLEMAN. If there is just a little follow-up, because we 

do have two more panels. Senator Levin? 

Senator LEVIN. Mr. Viale, going back to the rebate issue, you 

said that your customers get the average of $185 rebate, so about 

half that average initial fee is rebated to all of those customers you 

have got that get the plan and sign up, is that what you are saying? 

Mr. VIALE. A hundred-and-eighty-two dollars, correct. 

Senator LEVIN. That is the average? 

Mr. VIALE. That is the average amongst the whole group. 

Senator LEVIN. All of the group? 

Mr. VIALE. Correct. 

Senator LEVIN. So that half of your total money that you got in 

initial fees last year, for instance, was rebated? 

Mr. VIALE. That would be untrue because they have to be on the 

program for 6 months, so—but if you were to look at it over the 

time, yes, that would be true. 

Senator LEVIN. Only people who were on the program for 6 

months get rebates? 

Mr. VIALE. Correct. 

Senator LEVIN. What percentage of the 12 percent of the people 

that you sign up are on your program for 6 months? 

Mr. VIALE. The average length of time for a consumer on our program is 23 months. That stat I have. 

Senator LEVIN. So you don’t have that figure, what percentage of 

people drop out before 6 months and therefore don’t get a rebate 

at all? 

Mr. VIALE. No. I do have that around 20 percent actually get 

more than their initial fee back in rebates. 

Senator LEVIN. But you don’t have the percentage that get nothing because they dropped out after——

Mr. VIALE. I don’t have that percentage here, no. 

Senator LEVIN. Mr. Case, very quickly, what percentage of your 

customers make no contribution up front at all? 

Mr. CASE. I don’t have a percentage, sir, but 5,000-plus are on 

our program right now with no contributions whatsoever. 

Senator LEVIN. Up front? 

Mr. CASE. Anything, in all——

Senator LEVIN. And how many are in your program? 

Mr. CASE. We have approximately 72,000 people in the program 

right now. 

57

1See Exhibit No. 14 which appears in the Appendix on page 260. 

Senator LEVIN. Are the people who sign up these customers discouraging folks from making voluntary contributions? 

Mr. CASE. I am sorry? 

Senator LEVIN. Are they—excuse me. I misspoke. Are the people 

who engage in these first phone calls trying to sign up people, do 

they discourage folks from saying that they can’t make a contribution? 

Mr. CASE. Mr. Levin, as far as if people can’t make the contribution, we don’t jam it down their throat. I mean, we understand certain people are in certain hardship situations and——

Senator LEVIN. Exhibit 14 1 has the following item. The script 

tells your employees what to say in response to the customer who 

says, ‘‘I can’t afford a contribution right now, but maybe I can afford to contribute later,’’ and here is what your script advises the 

employee to say. ‘‘If you can afford to make a monthly payment, 

you can afford to make a contribution. That contribution is not 

going into our pocket. It is going to cover the costs of setting you 

up on the program. Would you rather have that payment go to us 

to help people like you get out of debt or would you like it to go 

into the creditors’ pocket as an extra interest? Would you rather 

support a non-profit company or help a bank get richer?’’ Is that 

your script? 

Mr. CASE. I didn’t personally write the script, sir. 

Senator LEVIN. Is that your company’s script? 

Mr. CASE. That is in the company handbook, yes. 

Senator LEVIN. Is that as disgusting as it sounds? Does that not 

disgust you? If you don’t call that pressure on somebody to make 

a contribution, how would you label that? 

Mr. CASE. I would call it pressure. 

Senator LEVIN. You would call it pressure. That is how voluntary 

your contributions are. 

One last question. Mr. Kroening, we have heard that the average 

initial fee that is charged by Cambridge is $380. What is your average initial fee? 

Mr. KROENING. Twenty dollars. 

Senator LEVIN. Thank you. Senator Dayton. 

Senator DAYTON. Thank you, Mr. Chairman. 

I will be brief because we have a roll call vote starting, but Mr. 

Kroening, I want to thank you for being here and presenting a 

comparative perspective. You have given new meaning to the 

phrase, ‘‘swimming with the sharks.’’ These are your compatriots. 

Ms. Craig, I am glad that this investigation has prompted a review 

of some of your practices. I hope they are conforming to Mr. 

Kroening’s. 

Ms. Craig, since I didn’t have a chance to ask—I am sorry, Mr. 

Case—before, Ms. Troy stated that she was not able to talk with 

a counselor when she wanted some counseling information and was 

referred instead to ‘‘customer service,’’ Who is customer service in 

your business? 

Mr. CASE. Sir, the customer service would either be The 

Ballenger Group or DebtWorks, depending on when she was on the 

program. I believe she was in 1999, so it would be DebtWorks. 

58

Senator DAYTON. And DebtWorks is another subsidiary of The 

Ballenger Group? 

Mr. CASE. DebtWorks was bought by The Ballenger Group, sir. 

Senator DAYTON. OK. But she says she got a different person 

each time, that she didn’t have anybody who was familiar with her 

case. So there is not a counselor? Mr. Allen is representing himself 

as a counselor, but he doesn’t do any counseling. 

Mr. CASE. He does do counseling, sir. My understanding of the 

customer service area is each client who comes onto the program, 

their customer number is their Social Security number. That enables them to be allowed to talk to any customer service representative simply by giving them their Social Security number to pull 

it up——

Senator DAYTON. Are those people trained as counselors, whatever that term means in your industry? 

Mr. CASE. The customer service? 

Senator DAYTON. Yes. 

Mr. CASE. They are trained in customer service, sir. 

Senator DAYTON. Who provides this ‘‘counseling’’? 

Mr. CASE. The counselors provide the up-front education. 

Senator DAYTON. In the 15 minutes that you are allotting for 

that purpose? 

Mr. CASE. My understanding is there are several calls. There is 

not one call and you are signing up. I mean, there is a lot of——

Senator DAYTON. What is the counseling? What is the content of 

the counseling? 

Mr. CASE. Right up front, there is a budget analysis done right 

away, because different people are in different situations. 

Senator DAYTON. Your budget analysis with people who are calling you, referring to your advertising, under the kind of circumstances they are in, does that budget analysis show that they 

are able to make voluntary ‘‘contributions’’? I mean, if they could 

make voluntary contributions, why would they be needing your 

service? 

Mr. CASE. Sir, there is a negotiation period which takes normally 

between 30 and 45 days with the creditors to make sure all these 

proposals are——

Senator DAYTON. You are charging $5 per account per month. 

Mr. CASE. Per month, right, for maintenance fees. 

Senator DAYTON. Five dollars per account per month? 

Mr. CASE. It is actually $7, sir. 

Senator DAYTON. Seven dollars per account per month. 

Mr. CASE. Correct. 

Senator DAYTON. That presumably is the cost, probably more 

than the cost, of actual time you are spending negotiating with 

these creditors. Why is there a voluntary contribution necessary at 

all? 

Mr. CASE. Because we are charged monthly fees by the back-office company which helps us defer those costs. 

Senator DAYTON. Who is a for-profit that owns these other operations, right? 

Mr. CASE. It is two different companies, sir. 

Senator DAYTON. Well, it is different companies but the same 

principals? 

59

Mr. CASE. No. 

Senator DAYTON. Some of the same? 

Mr. CASE. No. 

Senator DAYTON. No relationship at all between The Ballenger 

Group and AmeriDebt? 

Mr. CASE. No. 

Senator DAYTON. None at all between The Ballenger Group 

and——

Mr. CASE. Not at all. 

Senator DAYTON. OK. Just one last question. You talk about the 

value that you have achieved for your customers. How do you 

quantify all these tangible benefits, I think you called them? 

Mr. VIALE. Is this question to me? 

Senator DAYTON. No, Mr. Case. 

Mr. CASE. Oh, I am sorry, sir. What was the question? 

Senator DAYTON. For years, AmeriDebt helped consumers save 

millions by providing these various services. How do you determine 

what those savings are? What are the benefits the clients receive? 

Mr. CASE. We had an analysis done which we refer to, the Painter Analysis. It was a report done for our litigation in the State of 

Illinois and these are the numbers that the Painter Analysis came 

up with. 

Senator DAYTON. So when you say they have received approxi- mately $13,300 in tangible benefits——

Mr. CASE. That is correct. 

Senator DAYTON [continuing]. What are tangible benefits? 

Mr. CASE. If, in fact, they stayed, making minimum payments on 

their unsecured debt throughout—until the payment was paid off 

or go onto this debt management program and reap the benefits of 

re-aging the accounts, getting the interest dropped down, and getting the debt paid off in a 3- to 5-year time period, sir. 

Senator DAYTON. But what constitutes the tangible benefit? 

Mr. CASE. If, in fact, the interest rates were not lowered and they 

paid the minimum payments, it would take them, I forget the number, it is approximately, I believe, 20 years or so pay off this debt. 

Senator COLEMAN. Senator Dayton. 

Senator DAYTON. Is $13,300 in tangible benefits the sum of the 

money that they paid off? What are you calling a tangible benefit? 

Mr. CASE. It is a tangible benefit because they are not paying the 

interest rates they were once paying, sir. 

Senator DAYTON. So the interest rate differential, the value of 

that is $13,300 for an average client? 

Mr. CASE. That is my understanding. 

Senator DAYTON. You run the business, don’t you? Wouldn’t you 

know? 

Mr. CASE. That is my understanding. 

Senator DAYTON. Thank you, Mr. Chairman. 

Senator COLEMAN. Thank you. Just to clarify one thing and we 

will dismiss this panel. The Ballenger Group bought DebtWorks. 

That chart, though, DebtWorks was originally—Ballenger is now 

DebtWorks, is that correct? 

Mr. CASE. That is correct, sir. 

Senator COLEMAN. So when you answered Senator Dayton, you 

said that there is no relationship between The Ballenger Group 

60

and AmeriDebt, you are technically correct, but DebtWorks, which 

was the predecessor to The Ballenger Group, was started by Mr. 

Pukke, who was the husband of Pamela Pukke, is that correct? 

Mr. CASE. That is correct, sir. They did not serve on the boards 

at the same time, though. 

Senator COLEMAN. But you said there was no relationship. I just 

want to be very clear that there was very clearly a relationship 

when DebtWorks started this relationship with Debticated Scape, 

a relationship with DebtServe, a relationship with Dedicated Consumer Counseling, a relationship with CrediCure, a relationship 

with the Credit Network, a relationship with Fair Stream. All the 

folks who started those and were involved in those at one time 

were associated with AmeriDebt, is that correct? 

Mr. CASE. I don’t think that is correct, sir. 

Senator COLEMAN. Senator Dayton. 

Senator DAYTON. Thank you, Mr. Chairman. If his answer to me 

was as clarifying as his answer to the average customer, I can see 

why there is so much trouble. Thank you, Mr. Chairman. 

Senator COLEMAN. This panel will be excused. I want to thank 

you for your participation. 

We do have a vote. I have 6 minutes, and what I am going to 

do is I am going to call the third panel. If Senator Levin gets back, 

I will turn the gavel to him. Again, I want to thank everybody for 

appearing, Ms. Craig, Mr. Kroening, Mr. Viale, and Mr. Case. 

I will warn the panel that we are in the midst of a vote and if 

my colleague, Senator Levin, gets back within the next 2 minutes, 

we will continue. Otherwise, I will simply adjourn, take a 10-

minute break, and then reconvene. 

But in the interest of time, I would like to welcome our third 

panel to today’s hearing. This panel is comprised of the representatives of the for-profit companies that have contracts with some of 

the credit counseling agencies from panel two. I would welcome 

Andris Pukke, the President of DebtWorks; Michael Malesardi, the 

Chief Financial Officer of The Ballenger Group; and finally, 

Bernaldo Dancel, the Chief Executive Officer for Amerix Corporation. I do appreciate all of you being here and look forward to your 

testimony. 

John Puccio, the Chief Executive Officer of Brighton Debt Management Services, was invited to testify at today’s hearing. Yesterday afternoon, we learned that Mr. Puccio declined to testify because of health concerns. I understand that he is in the hospital. 

We certainly wish him a speedy recovery. 

In order to provide the Cambridge-Brighton entities with an opportunity to testify before this Subcommittee today, we extended 

an invitation to Mr. Puccio’s brother, Richard Puccio. Richard 

Puccio, like his brother, is a part-owner of entities in the Cambridge-Brighton enterprise and is involved in their activities. Richard Puccio declined to testify, as well. 

Senator COLEMAN. Mr. Pukke, Mr. Malesardi, and Mr. Dancel, 

we are anxious to hear your testimony today. You each have a certain level of corporate responsibility to deal with non-profit agencies in a manner consistent with their non-profit status and a manner consistent with the Internal Revenue Code. Some of you have 

61

changed your operations since the outset of the Subcommittee’s investigation, some of you have not. 

What I am going to do is I am going to swear in the panel and 

then we are going to take a 10-minute break because I think we 

are running close on the vote. 

Before we begin, pursuant to Rule 6, all witnesses who testify before the Subcommittee are required to be sworn. At this time, I 

would ask you all to please stand and raise your right hand. 

Do you swear the testimony you are about to give before the Subcommittee is the truth, the whole truth, and nothing but the truth, 

so help you, God? 

Mr. PUKKE. I do. 

Mr. MALESARDI. I do. 

Mr. DANCEL. I do. 

Senator COLEMAN. You may sit down, gentlemen, please. Mr. 

Pukke, you have somebody sitting next to you. Please identify that 

individual for the record. 

Mr. WILLIAMS. Senator Coleman, my name is John Williams. I 

am an attorney for Mr. Pukke. As we have informed the Subcommittee staff in correspondence, in view of the pending litigation 

and investigations into DebtWorks and Mr. Pukke, we have advised Mr. Pukke to decline to answer any questions and to assert 

his constitutional privilege. We understand the staff has, despite 

this, insisted that Mr. Pukke be here personally to assert his privileges and so he is here today. I am going to say he will have no 

prepared statement, of course. If you choose to put questions to 

him, he will assert his privilege. 

Senator COLEMAN. Thank you very much, Mr. Williams. 

What I will do now is I will adjourn the hearing for at the most 

10 minutes, but I ask all the members of the panel to please then 

be back after that 10-minute recess. So we will take a 10-minute 

recess. 

[Recess.] 

Senator COLEMAN. This hearing of the Permanent Subcommittee 

on Investigations is back in order. 

Mr. Pukke, I understand that you have made a request by correspondence regarding Rule 11 of the Subcommittee’s Rules of Procedure requesting that no television, motion picture, other cameras, 

or lights be directed at you. Rule 11 of the Subcommittee’s rules 

and procedures states a witness may request on grounds of distraction, harassment, personal safety, or physical discomfort that during the testimony, television, motion picture, other cameras and 

lights should not be directed at him or her. Such requests shall be 

ruled on by the Subcommittee Members present at the hearing. 

In considering Mr. Pukke’s request, I note the Subcommittee has 

rejected similar requests in the past. Therefore, after consulting 

with Ranking Member Senator Levin, without objection, the 

witness’s request to invoke Rule 11 is hereby denied. 

Mr. Pukke, I understand from counsel that you have invoked the 

Fifth Amendment privilege. I want the record, however, to reflect 

that this Subcommittee has always taken care to treat respectfully 

a witness who asserts a Fifth Amendment privilege. The invocation 

of that right by American citizens should not and does not imply 

guilt. This right does not, however, allow one to refuse to appear 

62

before the Subcommittee. A witness before the Subcommittee may 

assert a privilege against self-incrimination, refusing to answer 

specific questions, but cannot use the invocation of the Fifth 

Amendment to avoid appearing before the Subcommittee altogether. 

In furtherance of this Subcommittee’s hearing today, its ongoing 

fact finding responsibilities, and the Senatorial exercise of legislative duties, I will begin the questioning. 

TESTIMONY OF ANDRIS PUKKE, PRESIDENT, DEBTWORKS, 

INC., GERMANTOWN, MARYLAND, ACCOMPANIED BY JOHN 

WILLIAMS 

Senator COLEMAN. Mr. Pukke, when you first formed DebtWorks 

to offer back-end processing services to non-profit credit counseling 

agencies, your first customer was AmeriDebt. At this time, one of 

AmeriDebt’s directors was your wife, Pamela Shuster Pukke, and 

your brother, Erik, was an employee. How did you ensure that the 

contract you signed with AmeriDebt did not cause it to overpay for 

the services you were performing for it? 

Mr. PUKKE. Senator, based on advice from counsel, I invoke my 

right to not answer that question. 

Senator COLEMAN. After you formed DebtWorks, friends and 

family members of yours created additional non-profit counseling 

agencies which promptly contracted with your company for services. Is it fair to say that the primary motive of setting up these 

additional agencies was to generate more revenue for DebtWorks? 

Mr. PUKKE. On advice from counsel, I invoke my right to not answer that question. 

Senator COLEMAN. In 1996, you pleaded guilty to a Federal 

charge of defrauding consumers by using your company, Infinity 

Resources, to falsely promise to broker debt consolidation loans. It 

is my understanding that customers of AmeriDebt and the other 10 

non-profit agencies currently contracted with The Ballenger Group 

are still referred to your company. Is this correct? 

Mr. PUKKE. Senator, on advice of counsel, I am asserting my 

right to not answer that question. 

Senator COLEMAN. Last question, Mr. Pukke. I also understand 

that you own Fidelity and Trust Mortgage Company and F&M 

Mortgage Company. Are customers of AmeriDebt and the other 10 

non-profit agencies still referred to those companies? 

Mr. PUKKE. Again, I am asserting my right to not answer that 

question. 

Senator COLEMAN. Mr. Pukke, you have been asked several specific questions about DebtWorks and about your practices within 

the credit counseling industry. In response to each of the questions, 

you have asserted your Fifth Amendment privilege. Is it your intention to assert the Fifth Amendment privilege to any question 

that might be directed to you by the Subcommittee, any other questions that might be directed to you by the Subcommittee regarding 

the organization of DebtWorks and its practices? 

Mr. WILLIAMS. Senator Coleman, in view of what we understand 

to be the pointed questions, I can’t imagine a question that you are 

going to put to him that we will not assert the Fifth, although we 

will respond to any question that you may put to us. 

63

1The prepared statement of Mr. Malesardi with attachments appears in the Appendix on page 

153. 

Senator COLEMAN. Given the fact that you are asserting your 

Fifth Amendment right against self-incrimination to any more 

questions asked by the Subcommittee, you are hereby excused. 

Mr. WILLIAMS. Thank you. 

Senator COLEMAN. Mr. Malesardi. 

TESTIMONY OF MICHAEL MALESARDI,1 CHIEF FINANCIAL OFFICER, THE BALLENGER GROUP, LLC, FREDERICK, MARYLAND 

Mr. MALESARDI. Good morning, Mr. Chairman and Senators. My 

name is Michael Malesardi and I am the Chief Financial Officer of 

The Ballenger Group. Thank you for inviting me to speak before 

you today and thank you to the Subcommittee staff for their help 

and courtesy in helping us respond to your data requests and prepare for our face-to-face meetings. 

Ballenger began doing business on January 1, 2003, as an independent solutions provider of custom software development, payment processing services, back-office functions, and marketing programs, with a specialization in consumer debt management. Our 

clients are credit counseling agencies and we receive no direct 

funding from consumers or credit card companies. 

Clearly, the status quo in the credit counseling industry is not 

acceptable. We are committed to the establishment of fair and efficient Federal regulations that protect consumers and preempt the 

confusing and costly patchwork of State regulations. 

By way of background, from 1982 to 1992, I spent 10 years as 

a certified public accountant with Price Waterhouse. From 1992 

until 2002, I was controller or CFO of three SEC registrants. In 

July 2002, I joined a company by the name of DebtWorks as CFO. 

Along with several other newly-hired executives, I was hired to 

help the owner of DebtWorks, Andris Pukke, prepare for and execute a sale of his company to a third party. 

In the summer of 2002, the new management team solicited bids 

from third parties who were interested in acquiring a majority 

stake in DebtWorks, primarily private equity firms. Ultimately, the 

negotiations were unsuccessful and we mutually terminated them 

in November 2002. 

Following termination of negotiations with the third parties, the 

management team then approached Mr. Pukke in December 2002 

about forming a new independent company and executing a management buyout of a majority interest in the operating assets of 

DebtWorks. The management team retained its own counsel, separate from DebtWorks, and after extensive negotiations, we reached 

an agreement to form The Ballenger Group and began doing business on January 1, 2003. 

The Ballenger Group did not acquire the stock of DebtWorks and 

DebtWorks continued as a separate, unrelated legal entity with its 

own separate management and business operations. The Ballenger 

Group is not a successor to DebtWorks. 

From January 1 through October 31, 2003, The Ballenger Group 

was 51 percent owned by the management team, with the remainVerDate 0ct 09 2002 13:25 Aug 17, 2004 Jkt 093477 PO 00000 Frm 00071 Fmt 6633 Sfmt 6601 C:\DOCS\93477.TXT SAFFAIRS PsN: PHOGAN
64

ing 49 percent owned by DebtWorks. To ensure the managerial 

independence of The Ballenger Group, our purchase agreement virtually eliminated any possibility of control or influence by 

DebtWorks, including the removal of any of their management, voting, or board rights. 

On October 31, 2003, the management team then increased its 

ownership of The Ballenger Group to 100 percent, completely removing all of DebtWorks’ ownership. 

Mr. Chairman, in plain English, I want to reemphasize that 

since our inception as an operating business, neither Mr. Pukke 

nor DebtWorks have had anything to do with the management, operations, or control of The Ballenger Group. There is no ongoing relationship between The Ballenger Group and DebtWorks other 

than payments associated with our purchase of the assets. 

Concerning the three companies the Subcommittee asked us 

about as to their relationship with DebtWorks, I am not familiar 

with either F&M Mortgage or Fidelity and Trust Mortgage. My 

knowledge of Infinity Resources Group is limited to an understanding that it is a debt consolidation loan business in which Mr. 

Pukke has been involved, but The Ballenger Group does not and 

has never performed any service for or on behalf of Infinity. 

Since the formation of The Ballenger Group, we have added two 

new CCA clients and have had one existing client reinitiate counseling operations. The Ballenger Group has never initiated the formation of a credit counseling agency and has no plans ever to do 

so. 

At the request of their banks, The Ballenger Group agreed to act 

as a back-up guarantor to the start-up loans that these three agencies obtained. Our guarantee falls in line behind the obligation of 

the agency and the personal guarantees of their principals. 

Since the launch of The Ballenger Group in 2003 as an independent company, we have been steadfast in setting The Ballenger 

Group apart from DebtWorks and Mr. Pukke. In fact, during 2003, 

we terminated a client relationship with Dedicated, an agency that 

was headed by his brother. 

Mr. Chairman, we can’t change the historic fact that The 

Ballenger Group acquired the assets of DebtWorks, but in creating 

The Ballenger Group, we created a new entity operating under new 

management and have held ourselves to a new standard for the 

company, our client agencies, and the consumers that they serve. 

We appreciate the chance to set the record straight with respect to 

our complete independence from Mr. Pukke and DebtWorks. 

We are actively engaged in proposing reforms we believe will 

make the industry more consumer-friendly, including national regulation and competition. Our written testimony, which we would 

ask be placed in the record, addresses our thoughts on reforms. 

Thank you for the opportunity to be here today and I would be 

pleased to take any questions. 

Senator COLEMAN. Your written testimony will be placed in the 

record, without objection. 

I will stand corrected, Mr. Malesardi. I think in questioning the 

previous panel, on a number of occasions, I called The Ballenger 

Group a successor to DebtWorks and your testimony has made it 

65

1The prepared statement of Mr. Dancel appears in the Appendix on page 175. 

very clear that you are not a successor to DebtWorks, and so the 

record will be corrected on that account. 

Mr. MALESARDI. Thank you, Senator. 

Senator COLEMAN. Thank you. Mr. Dancel. 

TESTIMONY OF BERNALDO DANCEL,1 CHIEF EXECUTIVE 

OFFICER, AMERIX CORPORATION, COLUMBIA, MARYLAND 

Mr. DANCEL. Thank you, Mr. Chairman and Members of the Subcommittee. My name is Bernie Dancel. I serve as the CEO of Ascend One Corporation. I appreciate the opportunity to discuss with 

you important issues concerning credit counseling. The Subcommittee’s inquiry is important, and at least for our company has stimulated constructive self-examination. 

I want to make two points today. First, I do not believe the term 

‘‘profiteering’’ in the title of this hearing applies to our company, 

as I will explain in discussing several aspects of credit counseling 

and our company. Second, since there is always room for improvement, I will briefly discuss important initiatives we have undertaken, in no small part as a result of our interaction with the Subcommittee. 

I would like to begin with a word about how my own experience 

led me to the credit counseling field. Growing up, I watched my 

mother struggle financially and ultimately file for bankruptcy. And 

at age 25, after struggling to support two households as a divorced 

dad, I ended up filing for bankruptcy myself. This was one of the 

worst experiences of my life. 

Later, I worked as a counselor with a credit counseling agency. 

I saw firsthand that there was a better way to reach financially 

distressed consumers like myself. I realized that CCAs needed to 

be more accessible, offer more privacy, and become more efficient 

by using modern technology to meet this growing demand. 

Now let me turn to my main points. First, the term ‘‘profiteering’’ 

does not apply to our company. Of course, we are a for-profit business and we serve non-profit entities, but I am sure you agree that 

there is nothing wrong with that. The real question is whether we 

offer good service at a fair price, and the answer to that is clearly 

yes. 

First, we offer unique and valuable services that agencies can 

purchase more efficiently from us than performing these services 

themselves. 

Second, our prices are clearly fair. The bottom line is that consumers working with the CCAs we serve typically contribute the 

same or less than what consumers pay with other CCAs. 

In addition, as the documents we produced to this Subcommittee 

show, we operate on a very low profit margin, generally less than 

3 percent before taxes annually. 

With respect to debt management plans, we recognize that DMPs 

are not right for everyone, and in fact, consumers, CCAs, and 

Amerix are all best off when DMPs are limited to consumers who 

are qualified for them. More than 70 percent of callers to CCAs we 

serve do not enroll on a debt management plan, as is true for CCAs 

that are members of the two leading trade associations. 

66

1See Exhibit No. 3 which appears in the Appendix on page 242. 

Also, and Mr. Chairman, this is critical, the CCAs we serve do 

not charge large up-front fees. They charge nothing. So we can only 

recoup our costs if the consumer sticks with their plan. Some other 

entities, including AmeriDebt and Cambridge, charge hefty upfront fees that let them recoup their cost on day one. So where 

these other CCAs make money if the consumers immediately drop 

off their debt management plans, we actually lose money on consumers who don’t stick with their plans for an extended period of 

time. 

We agree with the Subcommittee that education and counseling 

for all consumers is crucial. The CCAs we serve provide a variety 

of educational resources through community programs, web-based 

materials, and monthly publications. And we publish and update a 

comprehensive online educational library available to any visitors 

to the Care One website. In addition, DMPs themselves are a very 

valuable educational tool—indeed the best—when they are right for 

a consumer. By making regular payments and exercising financial 

discipline, consumers learn to stick to a plan, modify their behavior, and get back on their feet. 

At the same time, we recognize we can do better. In that spirit, 

we recently announced a number of new initiatives summarized in 

our March 16 letter to this Subcommittee. These initiatives are designed to ensure that all consumers get a useful education and 

counseling experience, whether or not they use a DMP. 

First, we are adopting enhanced licensing standards for Care 

One that require agencies to provide patient counseling to every 

consumer, devote significant time to community outreach, and comply with standards established by the two leading trade associations. We will also offer each consumer a personalized budget worksheet whether or not they enroll in a DMP. 

Second, we will assist our CCA clients in revising scripts consistent with this objective. 

Third, we no longer offer overflow origination services. 

Fourth, we are eliminating from our service contracts certain 

provisions relating to debt management plans, such as assist rates 

and revenue standards. 

Finally, we have made a $5 million commitment to the Ascend 

One Fund for Financial Literacy to educate children and young 

adults about how to manage their finances responsibly. 

Mr. Chairman, Ascend One is committed to playing a positive 

role in the credit counseling field so that all consumers can get the 

help they need, like myself, delivered in a fair and straightforward 

manner. Thank you, and I look forward to your questions. 

Senator COLEMAN. Thank you very much, Mr. Dancel. 

If we can get Exhibit 3 up,1 to both you gentlemen, what we are 

struggling with here is the reality of individuals being processed 

through non-profits. I mean, that is the voice that they hear, and 

you heard from the consumers here and even some of the employees. There is something about being a non-profit that makes people 

feel safe. 

And the concern we have is the relationship between the nonprofits and the for-profits. In many cases, as with one of the inVerDate 0ct 09 2002 13:25 Aug 17, 2004 Jkt 093477 PO 00000 Frm 00074 Fmt 6633 Sfmt 6601 C:\DOCS\93477.TXT SAFFAIRS PsN: PHOGAN
67

stances we had here, what you have got are non-profits that have 

relationships, either marital relationships or friendship relationships. So I am trying to sort out, what is the right way to go here? 

I mean, is it at all possible for consumers to benefit when you have 

situations such as what The Ballenger Group is trying to do and 

Amerix is trying to do? 

One of the issues, one of the criteria that I think I would like 

to see in place is the for-profit shouldn’t be in a position to substantially influence the non-profit so that the non-profits can’t do things 

independently. 

Mr. Dancel, I would ask you, looking at Amerix, and we had folks 

here from American Financial, can you talk to me about the independence of the non-profits in dealing with you? Was there a point 

in time where you actually had what I might call quotas in terms 

of the number of folks that had to be signed onto DMPs? 

Mr. DANCEL. The CCA clients that we have are completely independent organizations. There is no overlap in governance or board 

membership or executive or any kind of management positions. 

They make decisions independent of one another as well as independent of Ascend One or Amerix. In fact, we have had CCA clients in the past who have terminated particular services that we 

provide and in other cases have terminated their relationship with 

us altogether. So I believe that is a demonstration that there is 

complete independence of these organizations from us. 

We have had in the past certain standards within our agreements with them. At one point, we had a transaction-based pricing 

model where we had a fairness opinion as to the fairness of the 

price that we provided. 

Senator COLEMAN. I just want to make sure I understand what 

transaction-based models mean. Can you, in lay terms, explain 

that? 

Mr. DANCEL. Sure. That is where, based on the activity, we 

charge them a flat amount for that service. It is not connected with 

any kind of sharing of revenue or other types of pricing models. 

Senator COLEMAN. I just want to clarify my notes here, looking 

back at some of the responses given earlier—did you at one time 

require credit counseling agencies to enroll 30 percent of their calls 

into a debt management plan? 

Mr. DANCEL. Yes, we did. There was a contractual standard that 

was set which we used—an industry standard, as you heard earlier 

today from the gentleman from Minnesota, that has been published 

through the NFCC as well as AICCCA—in terms of the number of 

customers who sign up for debt management enrollment after they 

have been counseled. It is approximately 30 percent. 

Senator COLEMAN. Doesn’t that really fly in the face of allowing 

credit counselors to make some independent judgment as to the 

needs of their particular client when you are actually setting a target, you have got to do 30 percent? 

Mr. DANCEL. This 30 percent simply allowed us in the event that 

over an extended period of time we could not recoup our costs for 

the services we provided, that we would be able to terminate the 

contract. 

68

Senator COLEMAN. I would suggest, though, that it flies in the 

face of what you would want from your credit counselors, to make 

independent judgments. Have you changed that policy, by the way? 

Mr. DANCEL. We have heard the Subcommittee’s concern about 

that and we have changed that. 

Senator COLEMAN. I appreciate that. 

Mr. Dancel, one other question. Our investigation showed that 

you started up a non-profit called, was it Genus Credit Management, is that correct? 

Mr. DANCEL. Yes, Mr. Chairman. 

Senator COLEMAN. And that Genus later sold its portfolio of debt 

management plan accounts to American Financial Solutions, and I 

think the figure was around $17 million. 

Mr. DANCEL. Yes, Genus Credit Management sold their portfolio 

to American Financial Solutions, I believe for $17 million in 2001. 

Senator COLEMAN. And can you tell us what happened to the 

proceeds from that sale? 

Mr. DANCEL. The proceeds for that sale, sir, went to Genus Credit Management, or the In-Charge Institute, the parent of Genus 

Credit Management. 

Senator COLEMAN. For what purposes? 

Mr. DANCEL. The In-Charge Institute sold the Genus Credit 

Management Portfolio to American Financial Solutions. They had 

independent—both parties, Genus Credit Management and AFS, 

had independent reasons for why that made sense to them. AFS 

wanted to grow their credit counseling business and the number of 

consumers that they were serving through counseling and education, and I believe Genus Credit Management and In-Charge Institute wanted to capitalize on that portfolio for other business ventures that they were looking at. 

Senator COLEMAN. I am just trying to get where the proceeds 

went. Again, where did those proceeds go? 

Mr. DANCEL. They went to In-Charge Institute. 

Senator COLEMAN. And who are the principals in that? 

Mr. DANCEL. I only know that Dave Jones, at the time, was the 

chairman of In-Charge Institute. I don’t know who the other principals were. 

Senator COLEMAN. Mr. Dancel, one further question, and I do appreciate some of the changes that you have made. Do you support 

the standards that NFCC or AICCCA provide? 

Mr. DANCEL. We do support those standards. In fact, in the 

standards that we have for Care One agencies that license that 

service mark, they are required to comply with those standards. 

Senator COLEMAN. Mr. Malesardi, does The Ballenger Group support those same standards? 

Mr. MALESARDI. We support industry standards. We don’t have 

any NFCC clients, but I can tell you that the standards that we 

do offer exceed any industry standards out there and we do—we 

are ISO certified and have five metrics that do exceed those. 

Senator COLEMAN. How does The Ballenger Group exercise some 

sense of corporate responsibility to ensure that its counseling agency truly educates its consumers? I mean, you have heard a lot of 

testimony today that is not occurring the way it should. So what 

69

1See Exhibit No. 2 which appears in the Appendix on page 241. 

do you do? Talk to me a little bit about corporate responsibility, 

what you do to make sure that happens. 

Mr. MALESARDI. OK. Well, we are definitely pro-consumer and 

you can see that in the fulfillment agreement that we have provided to the Subcommittee. We did add last year three best practices that really cover three different areas, and that is that the 

credit counseling agencies that we serve should be providing full 

disclosure of material facts, that they should be doing things to 

maximize consumer satisfaction, and also minimize consumer confusion, and the agreement provides that if they don’t adopt the best 

practices that we have provided, which include sample contracts, 

sample disclosure statements, that we can terminate that relationship. 

Senator COLEMAN. Are these best practices mandatory or voluntary? 

Mr. MALESARDI. We consider them to be mandatory in the sense 

that if they don’t follow them, we can terminate the relationship. 

Senator COLEMAN. Do we have a chart 1 that is the organization 

chart for AmeriDebt? And again, I want the record to correct that 

The Ballenger Group is not the successor to DebtWorks. 

Mr. MALESARDI. Thank you. 

Senator COLEMAN. But is The Ballenger Group still serving, for 

instance, Fair Stream? 

Mr. MALESARDI. Fair Stream is one of the two new clients that 

we actually started providing services for in 2003 after the company was formed. 

Senator COLEMAN. And I believe Mr. Case would not affirm for 

the record that the entities Fair Stream and Credit Network, 

DebtServe, DebtScape, Debticated, all those have the names of individuals who we believe, the Subcommittee investigation believes 

were involved in AmeriDebt. It appears that, for instance, Andrew 

Smith, originally involved in AmeriDebt, is now involved in Fair 

Stream. 

I am sitting in your shoes and AmeriDebt is the poster child for 

ills in this industry. How do you generate a level of confidence that 

the folks who are working through agencies with folks who are 

former AmeriDebt officers, that they are serving their clients in a 

proper fashion? 

Mr. MALESARDI. I think you have to look to the fact that these 

are distinct entities, that The Ballenger Group is providing only 

certain services for these agencies. So they take the consumer 

through the counseling and education process, and that is the point 

at which time The Ballenger Group takes over responsibility. I can 

tell the Subcommittee that the data entry and the payment processing and the customer support we provide are superior to anything we think they can get elsewhere in the industry. 

Senator COLEMAN. Thank you, Mr. Malesardi. 

I would note that Mr. Puccio cannot be here today. We will be 

keeping the record open. There are questions that we still need to 

have answered, and so we will keep the record open in regard to 

questions that Mr. Puccio can answer. 

With that, I will turn to Senator Levin. 

70

Senator LEVIN. Thank you, Mr. Chairman. 

Mr. Dancel, American Financial Solutions testified that as a result of the PSI, our investigation, it wants to renegotiate the contract that it has with you for processing. Are you aware of that? 

Mr. DANCEL. Yes, we are. 

Senator LEVIN. That they have made that announcement? Are 

you willing to renegotiate? 

Mr. DANCEL. Yes, Senator, we are. 

Senator LEVIN. When does your contract with them run out? 

Mr. DANCEL. August 2005. 

Senator LEVIN. And your contract charges them $30 per plan per 

month, is that correct? 

Mr. DANCEL. No, that would not be correct. The cost depends on 

the level of service that we are providing to them on a per account 

basis. So that would range anywhere from 50 percent of their revenue to 85 percent of their revenue. 

Senator LEVIN. Depending on the services you provide? 

Mr. DANCEL. Depending on the number of services we are providing, yes. 

Senator LEVIN. What does that average, do you know, per plan, 

per debt management plan per month? 

Mr. DANCEL. Our average across the AFS customer base, the average would be in the $15 to $16 level. 

Senator LEVIN. Per month? 

Mr. DANCEL. Yes, sir. 

Senator LEVIN. Now, Southern New England pays an outside 

vendor $1.20 per plan per month and Consumer Credit Counseling 

Services of Los Angeles pays an outside vendor $2 per plan per 

month. Why is there such a huge difference between what you 

charge and what they charge? 

Mr. DANCEL. I don’t know what list of services they are providing. I don’t believe we are comparing apples to apples. 

Senator LEVIN. How many competitors do you have? 

Mr. DANCEL. Processing entities? 

Senator LEVIN. Yes, that do the same type of work you do. 

Mr. DANCEL. I am not sure how many there are out there. 

Senator LEVIN. Would there be a handful? 

Mr. DANCEL. Again, that depends on the level of—what services 

are being provided——

Senator LEVIN. The type of services, the range of services you 

provide. How many would there be? 

Mr. DANCEL. I believe there probably are just a handful of companies that provide all the services that we provide. 

Senator LEVIN. Is The Ballenger Group one of them? 

Mr. DANCEL. I don’t know the business of The Ballenger Group. 

Senator LEVIN. Have you competed with any other company for 

a service contract? 

Mr. DANCEL. Yes, we have. American Financial Solutions, in fact, 

has put out a request for proposal——

Senator LEVIN. Now? 

Mr. DANCEL. They put out a request for proposal in 2001 when 

they were looking at purchasing the Genus portfolio and they put 

it out to many suppliers within the industry as well as processors 

71

outside the industry and they were not able to get any comparable 

price to what we were——

Senator LEVIN. So the contract that you won was a contract that 

was bid on by others? 

Mr. DANCEL. They put out a request for proposal. I don’t know 

what types of bids came in, but they came back to us and said they 

couldn’t get it at a price that we were offering. 

Senator LEVIN. They solicited proposals on the contract that you 

are now under with them? 

Mr. DANCEL. Yes. 

Senator LEVIN. Is the 50 to 80 percent of all the income that they 

generate a large percentage compared to what other processors like 

you get? 

Mr. DANCEL. We don’t believe that AFS or any of our other credit 

counseling agency clients can get the services that we provide at 

the price that we provide it anywhere, and evidence of that is that 

our CCAs are able to pass that savings on to consumers, where 

they have no up-front contribution or fee and they meet, if not 

lower, the monthly amount of voluntary contribution that they ask 

for from the consumer is either at the NFCC or AICCCA standards 

or lower than most, as well as they are able to do quite a lot of 

education and counseling activity. For example, I believe AFS in 

just the last 12 months has provided to their foundation over $4 

million towards education and scholarships. 

Senator LEVIN. You are saying that your clients do not charge 

up-front fees, is that what you said? 

Mr. DANCEL. Yes. They charge no up-front fee whatsoever. 

Senator LEVIN. None of them? 

Mr. DANCEL. None of them. 

Senator LEVIN. Mr. Malesardi, you charge AmeriDebt a monthly 

processing fee of about $25 per month, is that about right? 

Mr. MALESARDI. That is correct. 

Senator LEVIN. Per plan? 

Mr. MALESARDI. Per DMP, that is correct. 

Senator LEVIN. These figures, again, are a multiple of the $1 to 

$2 per month processing fee that the vendors that I referred to in 

New England and Los Angeles charge. What is your justification of 

that large fee, the larger fee? 

Mr. MALESARDI. I agree with Mr. Dancel’s comment that I don’t 

think these are apples to apples comparisons. 

Senator LEVIN. Your services are different from theirs? 

Mr. MALESARDI. We are providing a comprehensive service, software solution, and other things that go beyond that. 

Senator LEVIN. Have you had competitors for your contract with 

AmeriDebt? 

Mr. MALESARDI. AmeriDebt has—we haven’t done anything new 

with AmeriDebt since we assumed responsibility in 2003. We have, 

as I said in my statement, added two new clients in 2003. I don’t 

know what process they went through, but we were successful in 

getting that business. 

Senator LEVIN. And you don’t know if there were bids for those 

contracts or not? 

Mr. MALESARDI. I do not. 

72

Senator LEVIN. Were they negotiated directly with those other 

customers of yours? 

Mr. MALESARDI. We did negotiate them directly. We are independent entities. We went through a negotiation process, as would 

be typical for any service provider. 

Senator LEVIN. They didn’t tell you whether or not there were 

other people they were considering? 

Mr. MALESARDI. They did not disclose that to us. 

Senator LEVIN. All right. Did you hear the testimony about the 

voluntary contributions? 

Mr. MALESARDI. Is that directed to me? 

Senator LEVIN. From Mr. Case, did you hear that testimony that 

they——

Mr. MALESARDI. Yes, I did. 

Senator LEVIN. Were you troubled by it? 

Mr. MALESARDI. I can’t comment, really, on their business practices. We have a fixed fee that we charge to the credit counseling 

agencies. They are our client and not the ultimate consumer. 

Senator LEVIN. Were you troubled when they heard that they acknowledged that they pressured consumers into buying their service? Did you hear that? 

Mr. MALESARDI. I did hear his comment. 

Senator LEVIN. That amounted to pressure? 

Mr. MALESARDI. We are pro-consumer, and as I said, our best 

practices push on full disclosure of these facts and treating consumers in a fair manner so that they are satisfied, so we would 

promote any practice that leads to that. 

Senator LEVIN. You are benefitting from pressure being placed 

on somebody who is vulnerable. That is what it amounts to. 

Mr. MALESARDI. I would disagree with that assertion, because we 

get a flat fee from the credit counseling agency regardless of 

whether a consumer makes a contribution to them or not. So we 

don’t really benefit or get hurt by the amount of their contribution. 

Senator LEVIN. So the stronger that non-profit is has no effect on 

how much money you are paid? 

Mr. MALESARDI. No. I mean, our——

Senator LEVIN. It doesn’t make any difference how many customers they have? 

Mr. MALESARDI. Oh, we would benefit by if they have more customers in the sense that we get more of the revenue stream. But 

that is the extent of it. 

Senator LEVIN. Let me ask you again, because it seems to me it 

is so obvious. If they are not paid by any of their customers, you 

are not going to get paid, either, are you? 

Mr. MALESARDI. I think, ultimately, that is the risk in this business. That is the risk of being an outsourcer. 

Senator LEVIN. And if they pressure people into signing up with 

them, which they acknowledge that pitch does, since you are the 

indirect beneficiary of that, shouldn’t that trouble you just a little 

bit? 

Mr. MALESARDI. As I have said, we want them to follow best 

practices and if they didn’t follow best practices and didn’t change 

that, then we could terminate that relationship, as we have done. 

Senator LEVIN. As you have done? 

73

Mr. MALESARDI. Not with one client. 

Senator LEVIN. Thank you, Mr. Chairman. 

Senator COLEMAN. Senator Dayton. 

Senator DAYTON. Thank you, Mr. Chairman. 

Mr. Malesardi, I am trying to understand how this works. These 

non-profits are called credit counseling agencies and the people 

who come to them believe then that they are getting credit counseling services. I am going to use AmeriDebt as a prototype. I don’t 

know how the other 10 of your non-profits operate, but this is the 

only one I have any information on. They stated in the testimony 

we just received that AmeriDebt, and I am quoting on Mr. Case’s 

statement, page two, ‘‘AmeriDebt helped consumers save millions 

by providing credit counseling services and debt management plans 

to reduce monthly payments, lower interest rates, and reduce or 

eliminate late payment and overtime penalties.’’

It goes on to say, then, that ‘‘Correcting financial problems years 

in the making is no easy task. It is time and labor intensive for 

credit counselors, so as a result,’’ and this is a Visa board suggesting that credit counseling agencies contract with private sector 

companies to perform back-office administrative tasks. Is that you? 

Mr. MALESARDI. That is The Ballenger Group, yes. 

Senator DAYTON. And then you are stating in your testimony 

that you are an independent, for-profit provider of customer service 

solutions, custom software development, payment processing services, back-office functions, and marketing programs to credit counseling agencies. So your clients, as you view them, are these 11 

agencies. 

Mr. MALESARDI. Absolutely. 

Senator DAYTON. So when Ms. Troy testifies that she was pitched 

this plan by a ‘‘counselor,’’ and when she was calling back then to 

talk with the counselor, she was sent to a ‘‘customer service’’—

somebody in customer service. Is that under your entity or is that 

under AmeriDebt’s? 

Mr. MALESARDI. It would depend on what time it happened. If it 

was during the initial——

Senator DAYTON. Now. 

Mr. MALESARDI. No, I am saying, if it was during the initial 

counseling process, the back and forth that happens happens with 

a counselor at the credit counseling agency. Only once a consumer 

makes a decision to enroll in a debt management plan does that 

file get transferred to The Ballenger Group and does our work really begin on it. 

Senator DAYTON. So at that point of——

Mr. MALESARDI. So if a consumer then called up after that to ask 

questions about the status of payments, the status of the creditor 

proposal process, any of those types of administrative things, that 

would come to a customer service center that is under The 

Ballenger Group. But if a consumer then asked for additional follow-up counseling or education, that again goes back to the credit 

counseling agency and that is their responsibility. 

Senator DAYTON. Well, as I understand it from the testimony of 

Ms. Troy and also from what Mr. Allen said, they think that is 

your responsibility. As I understand it, Mr. Allen and his contemporaries at AmeriDebt are in sales. What you call counseling, it 

74

sounds to me like it is a sales pitch and then negotiation, and at 

that point, once this agreement or whatever is signed, then it goes 

to you. 

According to Ms. Troy—again, I don’t know the experience of 

other clients, but if she called for ‘‘counseling’’ at that point, they 

are getting somebody in your operation, not somebody in 

AmeriDebt. 

Mr. MALESARDI. That is not correct. 

Senator DAYTON. Who is providing the service? Who is providing what service, then, to the client for which they are paying $7 an 

account per month? 

Mr. MALESARDI. On a monthly basis for the process of providing 

the payment processing—they send their payments in and they get 

distributed to their creditors—and any follow-up customer support 

that they need related to that, that service is provided by The 

Ballenger Group. 

Senator DAYTON. And they are paying——

Mr. MALESARDI. If they have follow-up questions on their counseling or budgeting, that service is provided by the credit counseling agency. 

Senator DAYTON. But according to the testimony of at least one 

person today, they go to you when they call for ‘‘counseling.’’ Who 

establishes this plan? Who takes the information from the client 

and establishes this DMP? 

Mr. MALESARDI. The credit counseling agency does that. 

Senator DAYTON. Based on what? 

Mr. MALESARDI. They do it based on guidelines from the creditors as to what they are willing to do in terms of applying debt 

management plan benefits. 

Senator DAYTON. And you have no role in that whatsoever? 

Mr. MALESARDI. That is correct. 

Senator DAYTON. So they establish this and then they hand that 

over to you and then you just take the payments and process them 

and——

Mr. MALESARDI. Well, they would transmit the proposed plan to 

The Ballenger Group. We would then, in turn, issue proposals that 

would get sent electronically to their creditors, or by paper if they 

don’t accept it that way, and the creditors then respond back either 

accepting or denying and making changes to that. That is where 

the kind of back and forth negotiation process begins that is very 

time and labor intensive. 

Senator DAYTON. So the credit counseling agency is establishing 

the framework of the plan or the concept of the plan and then you 

negotiate that actual arrangement with those various creditors? 

Mr. MALESARDI. If it is a major creditor, they have established 

guidelines as to what they are willing to do. 

Senator DAYTON. So it is a no-brainer. That is established——

Mr. MALESARDI. If the——

Senator DAYTON. You are just plugging in numbers. 

Mr. MALESARDI. Yes. If the proper information is provided by the 

consumer, then it is a no-brainer. If they understate, for example, 

how much they owe to a particular creditor, then the creditor will 

deny that proposal and insist on a few more dollars. If their creditors are not one of the major creditors, I mean, it can be doctors, 

75

dentists, or people like that who don’t have established policies, 

then there is more interaction with that creditor. 

Senator DAYTON. There is millions of dollars to savings to consumers by credit counseling services and debt management plans. 

Where does that come from? Where do they save money in this 

whole process? They are paying more in the voluntary contribution. 

They are paying more—in addition to everything else they owe, 

they are paying more to you and to AmeriDebt. Where do they realize savings in this? 

Mr. MALESARDI. I can’t speak to the specific example you gave, 

but I do know that relative to the high interest rate and the overlimit fees and the late payment charges that they are incurring, 

that when those are reduced by the creditors to the benefits they 

offer under a DMP, there are dramatic savings to be made, and 

over time, that is significant. 

Senator DAYTON. Who determines what those dramatic savings 

are? Are you quantifying those dramatic savings? 

Mr. MALESARDI. We do not. That would be——

Senator DAYTON. But you are negotiating the final arrangement. 

Is AmeriDebt computing that? They don’t even know what the final 

arrangement is. You are handling that. Who is keeping score for 

the consumer? 

Mr. MALESARDI. The credit counseling agency would quantify for 

the consumer what kinds of savings they can get from enrolling in 

a DMP. 

Senator DAYTON. Based on a plan that they submit to you, but 

then you negotiate those actual arrangements with the creditors? 

Mr. MALESARDI. I am sorry if I am not being clear, but when the 

proposed debt management plan comes in to us, it has already 

been set up by the credit counseling agency and the savings or the 

costs of that program——

Senator DAYTON. I thought you said you were negotiating with 

the creditors. 

Mr. MALESARDI. I did say we transmit that proposal that the 

CCA has made. We transmit that to the creditors, and if there is 

a need for an adjustment based on what the creditors want, then 

there is a back and forth process. I am not sure negotiation is the 

proper term, and I know I used that, but——

Senator COLEMAN. Senator Dayton——

Mr. MALESARDI. It is an administrative back and forth. 

Senator DAYTON. I just don’t understand where this millions of 

dollars of savings——

Mr. MALESARDI. To the consumers? 

Senator DAYTON [continuing]. Where it comes from. The consumer, it seems to me, is paying—I mean, you are just setting up 

arrangements for them to pay what they owe and then you are getting something back from the creditors for doing so, and then they 

don’t in your case even see their fair share or whatever it is called 

of that. And then they are paying an additional surcharge of $7 an 

account per month of which you are getting $25 per month per account. I mean, I see where you are making your money. I see 

where AmeriDebt is making its money. I don’t see where the consumer is getting anything. It is apparent to me that it has got to 

be more costly. 

76

1See Exhibit No. 14 which appears in the Appendix on page 260. 

Mr. MALESARDI. I don’t think that is the case. I think if you look 

at a lot of the industry information, the consumers are being 

charged penalty rates of interest that may be 25 percent or higher, 

and by enrolling in a DMP, they get that reduced. 

Senator COLEMAN. Senator Dayton, we are going to have to 

rest——

Senator DAYTON. I just want to thank you for this——

Senator COLEMAN. I will give you an opportunity for follow-up 

questions, if you want. 

Senator DAYTON. Thank you. I am going to have to leave, but I 

want to thank you for this hearing. It has been extremely valuable 

and you have gotten into an area that is very disturbing and I 

thank you very much for your leadership on this. 

Senator COLEMAN. Thank you, Senator. 

I just have one follow-up, perhaps two questions. Mr. Malesardi, 

just to follow up on Senator Levin’s question, he asked if you were 

concerned. May we have Exhibit 14? 1 I want to make it first very 

clear that you make your money off of folks who enrolled in DMPs, 

right? In other words, your income is dependent—the relationships 

you have with the credit counseling agencies are based on the number of folks involved in debt management plans, is that correct? 

Mr. MALESARDI. That is correct. That is our business. 

Senator COLEMAN. So Senator Levin asked whether you were at 

all concerned about pressure tactics and you really didn’t answer 

that very directly. The reality is that you benefit if folks use pressure tactics, is that a fair statement? 

Mr. MALESARDI. I will say that we are concerned about pressure 

tactics because we are pro-consumer. We would not want to see 

somebody pushed into a DMP that they shouldn’t be in. 

Senator COLEMAN. So my question, then, is if we look at Exhibit 

14 where we have folks saying, ‘‘would you rather have that payment go to us to help people like you get out of debt or would you 

like it to go to the creditor’s pocket? Would you rather support a 

non-profit company or help a bank get richer?’’ Do you know if 

these practices are being used by the other credit counseling agencies that you provide services for? 

Mr. MALESARDI. They are not to my knowledge, and I am not 

comfortable with the way that is worded. 

Senator COLEMAN. Do you have a process by which you are 

aware of the scripts or the sales pitch that is being made by the 

credit counseling agencies that you service? 

Mr. MALESARDI. No. We don’t review the scripts of our credit 

counseling agency clients. 

Senator COLEMAN. I would suggest that you do, Mr. Malesardi, 

and Mr. Dancel, I would suggest that you do. 

The last thing, Mr. Dancel, Amerix is getting 50 to 85 percent 

of the non-profit’s clients’ revenue. How do you respond to the 

charge that you are siphoning off the bulk of the revenues from 

non-profits? 

Mr. DANCEL. We provide a level of services that are very valuable, and for them to do the services or provide the services themselves that we provide to them, we bring tremendous economies of 

77

1See Exhibit No. 18 which appears in the Appendix on page 264. 

scale, technological advance, which allows them to not only operate 

and put more funds toward their educational and counseling mission, but it also allows them to operate and provide debt management plans to consumers at a low cost up front as well as on a 

monthly voluntary contribution level that is commensurate with 

what is in the industry, if not lower. In fact, many consumers of 

our client agencies, over 32,000 consumers, get their service on a 

monthly basis for free and another 105,000 consumers of our credit 

counseling agency clients pay just a partial amount of the voluntary contribution that is requested. 

Senator COLEMAN. Your revenues have increased from $43 million to $95 million in 3 years between 1999 and 2002? 

Mr. DANCEL. Yes, that is correct. 

Senator COLEMAN. That is about a 120 percent increase? 

Mr. DANCEL. Yes, that is correct. 

Senator COLEMAN. Mr. Malesardi, one last——

Mr. MALESARDI. May I make a follow-up comment? 

Senator COLEMAN. Please. 

Mr. MALESARDI. I misspoke on one thing, and that is in the written testimony that we provided, on page 12, our best practices actually do include a form disclosure script to assist the CCAs in 

making adequate disclosures. So that is something we are involved 

with. 

Senator COLEMAN. I appreciate that, Mr. Malesardi. 

Mr. Malesardi, Mr. Dancel, I want to thank you for appearing. 

We will excuse this panel. 

I will note for the record that we will take Mr. Puccio’s deposition. That deposition, once he recovers, will become part of this official record.1

Senator COLEMAN. We will now call the fourth and final panel. 

I would like to welcome our final panel of witnesses for today’s 

important hearing. I appreciate their patience in this process. 

We have with us the Hon. Mark Everson, the Commissioner of 

the Internal Revenue Service. Mr. Everson, I welcome you back to 

the Subcommittee. You have testified before this Subcommittee numerous times in the past several months, including on tax shelter 

hearings and our focus on DOD contractors who cheat on their 

taxes. I appreciate your appearance once again. 

I want to acknowledge the IRS’s proposed 2005 budget request, which includes $300 million for enforcement efforts. On February 

26 of this year, I, along with Senator Levin, Senator Collins, and 

Senator Lieberman, wrote a letter to the Subcommittee on Transportation, Treasury, and General Government Appropriations in 

support of this 10.7 percent increase in IRS funding for enforcement efforts that will target tax cheaters. I support your efforts to 

vigorously enforce our laws. 

Today, however, I want to address the IRS’s response to date regarding non-profit entities within the credit counseling industry 

whose practices appear to violate the tax code and conflict with the 

specific purpose of granting tax-exempt status to credit counseling 

agencies. Moreover, while progress has been made on this front, I 

believe that more is needed. 

78

1The prepared statement of Mr. Everson with attachments appears in the Appendix on page 

181. 2The chart referred to appears as an attachment to the prepared remarks in the Appendix 

on page 189. 

I would also like to welcome the Hon. Thomas Leary, Commissioner of the Federal Trade Commission. I appreciate both of you 

being with us today and look forward to your testimony and getting 

your perspective on addressing the problems facing the credit industry. 

As you are aware, witnesses before this Subcommittee are required to be sworn. I would ask you to please rise and raise your 

right hand. 

Do you swear that the testimony you are about to give before 

this Subcommittee is the truth, the whole truth, and nothing but 

the truth, so help you, God? 

Mr. EVERSON. I do. 

Mr. LEARY. I do. 

Senator COLEMAN. Thank you, gentlemen. You know about the 

timing system. When you see the yellow light goes on, please conclude your testimony. Your full statements will be entered as part 

of the official record. 

With that, we will begin with Mr. Everson and then follow with 

Mr. Leary and then I shall have some questions. You may proceed, 

Commissioner. 

TESTIMONY OF MARK W. EVERSON,1 COMMISSIONER, 

INTERNAL REVENUE SERVICE 

Mr. EVERSON. Thank you, Mr. Chairman. I am pleased to be before you today to discuss IRS oversight of not-for-profit credit counseling agencies. 

Before turning to the subject at hand, I do wish to express my 

appreciation for your strong bipartisan support to the IRS and the 

President’s 2005 budget request. In your letter to Senators Shelby 

and Murray of February 26, you wrote, ‘‘Lack of resources has encouraged abuse of the Federal tax system and hampered IRS collection efforts. As a result, honest taxpayers pay more than their fair 

share.’’

Mr. Chairman, you, Senator Levin, Senators Collins and Lieberman went on to say, ‘‘Increased funding for IRS tax enforcement 

is critical, not only to stop the tax cheating but to strengthen public 

confidence in the fairness and integrity of our tax laws.’’

I agree with these views wholeheartedly. It is my strong belief 

that tax administration is a subject about which there can and 

should be bipartisan agreement. 

As you know, I have articulated four enforcement priorities for 

the IRS. They are up here on this chart.2 These priorities align 

closely with areas of inquiry of this Subcommittee. They include 

discourage and deter non-compliance with emphasis on corrosive 

activity by corporations, high-income individual taxpayers, and 

other contributors to the tax gap; assure that attorneys, accountants, and other tax practitioners adhere to professional standards 

and follow the law; and detect and deter domestic and offshorebased tax and financial criminal activity. 

79

These first three objectives directly address concerns which you 

surfaced last fall in your hearings concerning the development and 

marketing of abusive tax shelters. I look forward to a continuing 

dialogue with the Subcommittee on this subject. 

Our fourth enforcement objective is to discourage and deter noncompliance within tax-exempt and government entities and misuse 

of such entities by third parties for tax avoidance or other unintended purposes. This, of course, directly relates to your hearing 

today. 

I am pleased that you are addressing the area of tax-exempt 

credit counseling and I want to commend the staff for what I, in 

contrast to one of your witnesses, consider a balanced and very 

penetrating report. 

Although many credit counseling organizations provide important educational and charitable services, clearly, a growing number 

do not. We are concerned some organizations are preying on those 

in financial distress and using tax exemptions for reasons of profit 

rather than charity. We have selected over 50 organizations for examination. Over the course of this year, we will be examining 

about one-half of the total revenue of all known credit counseling 

organizations. 

Our work to date is raising serious issues about a number of 

these tax-exempt organizations. Some appear to have as their principal activities selling debt management plans rather than providing credit counseling. Rather than counseling, many companies 

are promising to restore favorable credit ratings or to provide commercial debt consolidation services. Some appear to operate as 

‘‘boiler room call shops’’ instead of charities. 

Some tax-exempts have boards of directors that are not representative of the local community. A board may also be related by 

family or business ties to for-profit entities that service the debt 

management plans. That raises the question, just who benefits 

from the charity, needy people in debt or company insiders and 

their business connections? 

We are also seeing tax-exempt companies that are supported by 

so-called ‘‘voluntary’’ fees from customers. I want to just note, my 

wife got a call last week, perhaps it was a poorly chosen target, but 

the first words out of the mouth of this lady were, ‘‘We are a charity and anything you put into the program is tax deductible.’’ It 

went on from there. [Laughter.] 

Mr. EVERSON. Often, these fees are in the hundreds of dollars 

and appear high in comparison to the nominal fees historically considered by the courts to be appropriate for such organizations. 

Non-compliance involving tax-exempt entities is especially disturbing because it involves organizations that are supposed to be 

carrying out some special or beneficial public purpose. If we don’t 

act to guarantee the integrity of our charities, there is a risk that 

Americans will lose faith in charitable organizations in general, 

damaging a vital part of our Nation’s social fabric. 

We are making an unprecedented effort to address abuses in the 

credit counseling industry. IRS examinations and investigations of 

credit counseling agencies may very well result in the lifting of 

some tax exemptions and, in fact, criminal referrals to the Department of Justice. Thank you. 

80

1The prepared statement of Mr. Leary appears in the Appendix on page 193. 

Senator COLEMAN. Thank you, Commissioner Everson. Commissioner Leary. 

TESTIMONY OF THOMAS B. LEARY,1 COMMISSIONER, FEDERAL 

TRADE COMMISSION 

Mr. LEARY. Yes, thank you, Mr. Chairman and Members of the 

Subcommittee. You have a written statement from me that represents the views of the Commission. Anything I say here orally, 

is on my own. 

Senator COLEMAN. That written statement will be entered as 

part of the official record, without objection. 

Mr. LEARY. Thank you. I personally want to thank the Subcommittee for putting a human face on the problems that we normally just see on cold pieces of paper and I am pleased to be here. 

The Commission recognizes that credit counseling services can 

help financially distressed consumers. But some firms are deceiving 

consumers about who they are, what they do, and how much they 

charge. For example, we have brought a lawsuit against AmeriDebt 

and against Mr. Pukke, who was briefly here this morning. Our 

complaint specifically pleads deceptive conduct of the kind you 

have heard so much about: Misrepresentation of non-profit status, 

misrepresentation that consumers would get counseling services, 

and misrepresentation that there were no up-front fees but rather 

only voluntary contributions. 

Your questions demonstrate that you know what this is all 

about, so I don’t need to elaborate in this oral statement, but just 

let me comment on some things you have heard this morning. 

You have heard a lot about practices that have changed very recently. I won’t comment on the adequacy of these changes, but this 

fact illustrates the spillover benefits of this inquiry and of our individual enforcement efforts. I want to emphasize, however, that lastminute conversions do not expunge a law violation if there was one. 

You have heard a lot about the disclosure of voluntary fees. Our 

concern is a practical one. Companies have every incentive to continue to obscure this issue. Ask yourself if people already in desperate shape, by definition, would otherwise volunteer to pay hundreds or thousands of dollar to a company that represents itself as 

a charity. 

You have heard some mention that there are some satisfied customers. Yes, indeed, there are some satisfied customers. But you 

can still violate the law even though there are some customers who 

are ultimately satisfied. The question is whether you gave people 

what you said you would give them and whether you told the truth 

about the fees you charge, and that is what our investigations and 

our cases are all about. 

Before I close, I want to mention some practices that were not 

discussed today that do continue to concern us. Number one is failure to pay creditors at all. Some credit counseling agencies that 

offer debt management plans may fail to pay creditors in a timely 

fashion or at all. This can result in serious consumer harm. 

Number two, promising results that cannot be delivered. Some 

agencies promise that they will lower consumers’ interest rates, 

81

monthly payments, or overall debt by an unrealistic amount. Some 

are also making false promises that they can eliminate accurate 

negative information from consumers’ credit reports. 

And number three is a failure to abide by telemarketing laws. To 

the extent that these agencies are not bona fide non-profit organizations, they must comply with the FTC’s telemarketing sales rule, 

including the new national Do Not Call Registry. 

I don’t know whether you are on that registry, Commissioner——

Mr. EVERSON. No, I am not, but I should be. [Laughter.] 

Mr. LEARY. We are continuing to address all these issues together with others using both law enforcement and consumer education. Our current efforts include joint education with the IRS and 

State regulators, and we have recently issued a joint press release 

that highlights troubling practices within the industry and provides tips for choosing a credit counselor. We have independently 

issued a variety of consumer educational materials so that consumers can spot fraud and deception and take action to avoid it. 

We remain concerned about deceptive practices in the credit 

counseling industry and will continue to work to protect consumers 

in this critical area. Thank you very much, Mr. Chairman. 

Senator COLEMAN. Thank you very much, Mr. Leary. 

I am going to go in reverse order here. And, I appreciate the 

human face that you put on this and the focus on the consumer, 

on the individual. 

Does the FTC have jurisdiction over non-profits? 

Mr. LEARY. We don’t have jurisdiction over genuine non-profits, 

Mr. Chairman, but the courts thus far have been very clear that 

we have jurisdiction over entities that are nominally non-profits 

but that are in practical import run on a for-profit basis. If for 

some reason or other that situation ever should change in the 

courts, we may be asking for something. 

Senator COLEMAN. And we appreciate your efforts to work in 

these areas and to have the willingness to address those situations 

where companies who are in the guise of non-profits may actually 

be operating as for-profit entities. 

Mr. LEARY. That is correct. 

Senator COLEMAN. I want to thank you for your involvement in 

this area. Are you troubled by the sales pitch that was being made 

or has been made, in this case it is AmeriDebt but certainly may 

be others, where individuals are being pushed to get involved in a 

debt management plan, are told, ‘‘Would you rather support a nonprofit company or help a bank get richer? Would you rather have 

that payment go to us to help people like you get out of debt or 

would you like it going into the creditor’s pocket?’’ Does that kind 

of language trouble you? 

Mr. LEARY. Well, I think that is an illustration of just what I was 

talking about, Senator. You know there is no magic formula for 

making a disclosure adequate to consumers. There are no magic 

words that will do it. As long as the incentives are there for people 

financially to benefit in a big way from deception on the issue of 

payments, they are going to try to do it one way or the other. It 

is an ongoing struggle. 

Senator COLEMAN. What kind of remedies are available? You 

have indicated that the FTC has brought actions against AmeriVerDate 0ct 09 2002 13:25 Aug 17, 2004 Jkt 093477 PO 00000 Frm 00089 Fmt 6633 Sfmt 6601 C:\DOCS\93477.TXT SAFFAIRS PsN: PHOGAN
82

Debt, its back-office processing facility, for deceptive practices, and 

Andris Pukke for deceptive practices. What kind of remedies is the 

FTC seeking? 

Mr. LEARY. We can go to court, Mr. Chairman, and we can get 

injunctions. We can get consumer redress. We can get disgorgement of unearned profits. The monetary remedies, we can get only 

through going to court. The longer administrative process on our 

own can provide the injunctive remedy, but well down the road. So 

we tend to bring these cases in court because the most important 

thing is to shut off the deception as fast as possible. 

Senator COLEMAN. I understand that AmeriDebt is winding up 

its operation. I don’t think they accept new customers. How does 

that affect your actions and will the FTC monitor entities affiliated 

with AmeriDebt after it has closed its doors? 

Mr. LEARY. I don’t want to comment on what we may or may not 

be doing with reference to other AmeriDebt affiliates that are not 

respondents in a particular action, Mr. Chairman, but I can assure 

you that we will seek and hopefully obtain relief that will give us 

the opportunity to remedy the situation across the board. 

Senator COLEMAN. Thank you, Mr. Leary. 

Commissioner Everson, you talked a little bit about tax-exempt 

entities, non-profits. You have made a very good point about the 

impact this has on all non-profits. If there are those out there who 

claim to be operating as non-profits that are not, it really has an 

impact on consumer confidence in non-profits. 

If an entity is involved in selling debt management plans as a 

primary focus or principal focus, maybe not sole but exclusive, selling a product, would that cause some concerns for the IRS if that 

entity is claiming to be an educational non-profit? 

Mr. EVERSON. It is important that the organization first comply 

with the representations it makes when it originally comes in for 

a determination as to its tax-exempt status. It has got to be consistent with what they have told us. What they have told us in 

order to be approved, would have to show that they are doing 

something for the public good. In this arena, that has traditionally 

meant education and counseling. Debt management has been in 

there, but largely for the lower-income folks and in a very targeted 

area. 

What you have seen here is a real expansion, and I would note 

one point that I haven’t heard raised so far is we saw a very significant increase in these applications for the establishment of 

these organizations after a short lag from when the new law, the 

Credit Repair Organization Act, came into effect. And that law 

made these up-front fees that folks are talking about illegal. But 

at the same time, it didn’t apply to the tax-exempts. 

So it is pretty clear that the players learned how to navigate the 

system and escape the regulation from the FTC and also these prohibitions that came in. So very clearly, this has all changed and 

gotten way out of line from traditional public good organizations. 

Senator COLEMAN. Does it trouble you when you hear testimony 

about what appear to be boiler room call shops, scripts to sell debt 

management plans? Does it trouble you when we are talking about 

entities that are operating in the guise of a 501(c)(3)? 

83

Mr. EVERSON. It troubled my wife when she received this call. I 

think that the testimony you have received today is shocking and 

that the report very clearly documents problems. In fact, you made 

reference to our hearing last fall. This reminds me of that hearing, 

where you have these interrelationships amongst parties established for mutual benefit. The difference there was that at least 

those were all profit-making businesses. Here, you have polluted 

charitable organizations. That is a terribly serious problem. 

Senator COLEMAN. Is this something in which one can actually 

have kind of a bright line test, FTC, are there bright lines? I am 

trying to figure out whether there are standards, whether we can 

kind of set some bright line standards, or does all of this have to 

be determined on a case-by-case basis? 

Mr. EVERSON. I think that this is more a case of looking at the 

individual facts and circumstances, and because of the complexity 

that has been established, that takes some time. There are some 

red flags, of course, and you have gone over some of them, these 

salaries, the extent of dealings with other related party profit-making entities. What we have to do as we conduct these audits is to 

look at the whole web and sift through it and see whether there 

is a private benefit that is being channeled to some related party 

which might be bad even if the entity itself that is making the call 

to the taxpayer is actually a not-for-profit. 

Senator COLEMAN. From the IRS perspective, and actually, I will 

ask both witnesses here, principally, there are enforcement 

concerns and enforcement efforts going on. Are you aware of any 

legislative changes that you would suggest that would increase or 

enhance your ability to provide enforcement in this area? Commissioner Everson, and then Commissioner Leary? 

Mr. EVERSON. Well, there is——

Senator COLEMAN. Aside from money for enforcement that we 

are working on. 

Mr. EVERSON. If I could indulge you for just one minute on that 

point. This chart shows you the decline in our enforcement personnel more broadly that took place and that you are familiar with. 

I want to show you just the impact on this tax-exempt piece of our 

business. 

Since starting here—the baseline is 1995—this is the increase in 

assets in 501(c)(3) organizations. There are almost a million of 

these organizations. This is the increase in returns filed. This is 

the decrease in staffing trying to do this work, and this——

Senator COLEMAN. This is IRS staffing, Commissioner? 

Mr. EVERSON. IRS staffing within the piece of the IRS that does 

this work. And this is this line adjusted for the returns filed. It 

takes into account the volume increase. 

I would suggest to you that that is a real challenge. Now, we are 

addressing that. We have the bill that we requested. But I would 

also say this gap doesn’t even take into account the changes in behavior which, of course, means that it is a much more complicated 

problem. You don’t have the same profile of abuse that you had 

back at the beginning. 

Senator COLEMAN. On the other hand, Commissioner Everson, 

would it be fair to say that if the IRS took aggressive action 

84

against a few individuals, that might impact the behavior of other 

individuals in this area? 

Mr. EVERSON. This is very much our hope, because we have at 

present an expectation that by the end of this calendar year, something like a third of the revenues, the actual examinations will 

have been closed already. I would hope these closures and the actions that would be taken if there are revocations, or as I mentioned, criminal referrals, the word will get out and people will 

come back to us to clean up their act. 

That is exactly what the Commissioner is saying. It doesn’t mean 

you can excuse the past behaviors. There could be sanctions. But 

I am hopeful that we don’t have to go as far down the road with 

as many audits as we are currently contemplating if there are adjustments like some of the adjustments you have already seen. 

Senator COLEMAN. And Commissioner Leary, the question about 

legislative changes or anything that you believe is required to enable you to do the work you need to do in this area? 

Mr. LEARY. Mr. Chairman, I think the Congress has been relatively generous with us in times of great budget pressure. At the 

moment, we are not asking for any legislative fix. However, as I 

indicated, in the event that we run into difficulties in the courts, 

and I don’t anticipate it, but in the event that we run into difficulties on this jurisdictional issue, we may be asking for some relief. 

Senator COLEMAN. I appreciate the work that you are doing, 

Commissioner. 

Commissioner Everson. 

Mr. EVERSON. Could I just second that point? Every time that 

you exempt a certain sector of organizations from, be it consumer 

protection laws or other areas, you will see a channeling into the 

tax-exempt area, I think, and you have to very carefully weigh 

when you make those exclusions. There are valid reasons for the 

good organizations, such as one that you had present here today, 

to enjoy exemptions, but you end up in a situation where the IRS 

acts as a proxy for the Federal Trade Commission. I am not sure 

that is wise public policy. 

Senator COLEMAN. I appreciate your perspectives, gentlemen. I 

want to thank you for appearing before this Subcommittee. I want 

to thank you for the good work that you do. 

The record of this hearing will be held open for 30 days. 

This hearing is now adjourned. 

[Whereupon, at 1:17 p.m., the Subcommittee was adjourned.] 

(85)

A P P E N D I X 

PREPARED STATEMENT OF SENATOR DURBIN 

The ‘‘Roaring 1990s’’ was an era of unprecedented prosperity. Yet for many Americans families, it was also a ‘‘Decade of Debt’’ that left them entering the new millennium with uncertainties about their financial health. 

Stagnant incomes. Job losses. Longer hours for lesser pay. Increasing healthcare 

expenses. Rising prescription drugs. Housing costs beyond reach. Soaring college 

tuitions. These are just some of the unrealistic demands made today on the fixed 

budgets of the American family. 

At a time when our Nation is continuing to suffer from economic troubles, many 

of us continue to be under siege financially. So where does the American family turn 

to for help? The unfortunate answer, for many, is ‘‘plastic.’’

Every day across this Nation, millions of families receive multiple solicitations in 

the mail from a variety of eager creditors. No matter what your particular financial 

situation may be, all you have to do is sign the short, customized, user-friendly application form on the dotted line, and you can activate your own personal line of 

credit today for tens of thousands of dollars in instant cash. 

It is literally that simple, and the aggressive marketing works. 

The credit card companies sent out over five billion solicitations in 2001 alone. 

Between 1993 and 2000, the amount of credit the industry extended grew from $777 

billion to almost $3 trillion. 

An important study called, ‘‘Borrowing to Make Ends Meet: The Growth of Credit 

Card Debt in the ’90s,’’ released in September 2003 by Demos, a nonpartisan nonprofit public policy research organization based in New York City, found that low 

and moderate-income families who are struggling financially, were forced to take on 

credit card debt at rates unprecedented in American history. 

Ironically, this took place during the 1990’s, the same decade that brought unprecedented prosperity to so many in our country. 

The Demos study also found that over the last decade, credit card debt among 

Americans over the age of 55 has increased more than it has among the general 

population. The increase is even more substantial among those over age 65. One 

reason for this demographic trend is the similar rise in prescription drug costs that 

has moved beyond reach for many seniors who live on fixed income. 

The study concludes that a combination of structural and economic trends, coupled with abusive credit card practices have left working families and older Americans with few options other than to borrow heavily just to make ends meet. 

Those lucky enough to own homes were able to rely on cash-out refinancing, home 

equity lines or credit lines secured by the roofs over their heads. But for the vast 

majority and for the low-income families without homes of their own, plastic was 

their only choice. 

Between 1989 and 2001, the total amount of credit card debt that Americans took 

on collectively almost tripled, from $238 billion to $692 billion, while the average 

American family experienced a 53 percent increase in credit card debt. 

This dangerous increase in personal debt took place during the same time that 

the personal savings rate for Americans continued to decline. 

This same period of time also saw the number of people filing for bankruptcy 

jump 125 percent. Each year, over 1.5 million Americans resort to bankruptcy as 

the only realistic option to escape from their financial dead end street. 

It is not just the low and moderate-income families facing bankruptcy. According 

to a ground breaking book by Harvard Law Professor Elizabeth Warren and Amelia 

Warren Tyagi, ‘‘The Two Income Trap: Why Middle-Class Mothers and Fathers are 

Going Broke,’’ the coming years will turn out to be most difficult for the average 

middle-class American family. 

86

It may sound counterintuitive, but Professor Warren makes a compelling argument that in today’s economy, it is the suburban home-owning family with two wage 

earners and school-age children who are most at risk financially, especially when 

one of the working parents loses a job or faces a medical emergency. 

More importantly, this book demonstrates that the major responsibility for the 

problem lies with the credit card industry and the unscrupulous practices that the 

industry engages in as it continues its greedy drive for more and more credit-hungry 

customers. 

The deregulation of Federal and State laws governing interest rates during the 

1970’s and 1980’s created incentives for credit issuers to take advantage of the laws 

in States with the most lender-friendly policies. The credit card industry flourished, 

as did its creative adoption of abusive penalty fees, late fees, and other hidden tricks 

designed to keep consumers in debt as long as possible. These practices correlated 

with skyrocketing profits for the industry. 

When consumers can no longer tolerate spiraling personal debts, they are left 

with little choice but to seek bankruptcy protection in court. Yet this Congress for 

years has been ready to pass harsh legislation to block even that relief from being 

granted to the consumer. 

The bankruptcy bill pending in the Senate today would do this while providing 

even more opportunities for the credit card industry to prosper. 

Today we will learn from this Subcommittee about another factor that has contributed to the gathering of the economic ‘‘Perfect Storm’’ facing indebted and financially desperate Americans. 

While the credit counseling industry was originally created to serve debtor-consumers navigate their way out of financial trouble, the industry as we know it today 

seems to lead the unwitting consumer directly into the eye of the Perfect Storm. 

Instead of serving as a good faith mediator between the debtor and creditor, many 

of these agencies have become nothing more than automated debt collectors for the 

credit card companies. 

Worse, today’s ‘‘nonprofit’’ counseling service provider is sorely mislabeled—it 

seeks profit and provides no counseling. 

The abusive credit counseling agency practices, together with the abusive credit 

card industry practices provide a potent one-two punch that knocks out most consumers’ hope of staying away from the bankruptcy court. 

I am glad that the abuses of the credit counseling industry are finally coming to 

light through this hearing. 

Last year, my home State of Illinois took an important first step by becoming the 

first State in the Nation to seek legal recourse against AmeriDebt, a national credit 

counseling agency, which, I should note, is represented at this hearing today. I am 

also glad to note that several other States have followed suit. 

On February 5, 2003, Illinois’ Attorney General Lisa Madigan filed a lawsuit alleging violations of my State’s consumer protection laws. 

For example, under the Illinois Debt Management Services Act, a debt counseling 

agency cannot charge more than a $50 initial fee and cannot charge more than $30 

average monthly fee per debtor. 

As our State’s Attorney General and this Subcommittee learned, however, 

AmeriDebt charges an average of approximately $305 for an initial fee, and averages intakes of approximately $35 per month per Illinois consumer. 

Similar to the findings of this Subcommittee, the suit in my homestate alleges 

that AmeriDebt violated Illinois’ Consumer Fraud Act by:

• Failing to disclose hidden fees and payments; 

• Failing to tell consumers that their first payment under a debt management 

plan is kept by the company instead of being sent to the creditors as the consumers were led to believe; 

• Representing that AmeriDebt will bring debtors’ accounts up to current status 

then failing to make timely payments to creditors; 

• Representing that consumers’ payments are ‘‘voluntary contributions’’ when 

they are in practice mandatory fees; and 

• Representing itself as a not-for-profit when the debt management work is 

done by a for-profit company.

Additionally, we discovered that AmeriDebt was never licensed in Illinois to operate as a debt management company, yet it took on over 11,000 clients in Illinois 

during years of marketing in the State. 

I would like to commend Chairman Coleman and Ranking Member Levin for undertaking a bipartisan investigation into this troubling industry and for holding this 

important hearing today. 

87

I hope this effort results in some serious and much-needed Federal legislation 

being adopted in this Congress, and I pledge to work with you and other interested 

members to make that happen. 

Ever since I drafted the first comprehensive bankruptcy reform bill in the 105th 

Congress, I have been concerned about some of the aggressive practices of the credit 

card industry and their growing influence in our economy. 

I believe we need to address these concerns and offer possible solutions in an open 

and honest way if we are going to change the course of the economic trend that is 

so intricately tied to the practices of that vast industry. 

I would also like to see us continue to look for reasonable reform in the bankruptcy area, and, in particular, focus on the conditions that lead American consumers to bankruptcy. Still, any serious reform effort has to take into consideration 

the significant role of the credit counseling industry, and I hope this industry, as 

a whole, will work with us in crafting some solutions that are unquestionably necessary. 

It is good to see representatives from the credit counseling industry here ready 

to explain their side of the story. I think we should be fair in listening to the legitimate voices on that side. 

We should be careful not to paint a picture with a broad brush that raises unfair 

suspicion about every single credit counseling agency in the Nation. I have no doubt 

that there are many credible agencies doing the counseling and educational work 

in the true spirit of their nonprofit missions. 

So I ask you—especially the agencies that are already living up to the high standards established by the associations—to join us in promoting stronger standards for 

everyone. 

I know that the bankruptcy bill currently pending in the Senate contains a provision that proposes standards for the credit counseling industry, which is a positive 

step. But I agree with the Subcommittee’s report and its recommendation that 

changes may be necessary to strengthen this provision in the bill, and I look forward to working on those changes. 

Finally, I urge the government representatives here today—the Internal Revenue 

Service and the Federal Trade Commission—to continue your diligent pursuit of the 

wrongdoers. 

As I know from my homestate’s experience, a few States have already shown leadership in protecting the citizens within their borders. But this is a problem with national implications and it is time for the Federal agencies to do all they can to curb 

these abusive practices. 

Please let us know what, if any, tools you need to carry out your pursuit of this 

matter. 

Thank you. 

PREPARED OPENING STATEMENT OF SENATOR LAUTENBERG 

Mr. Chairman: Thank you for holding this hearing on a very important subject: 

fraud and abuse in the credit counseling industry. 

This hearing is important because consumer debt has exploded in this country—

it now exceeds 2 trillion dollars. Revolving credit—mostly in the form of credit cards 

and overdraft protection—exceeds 750 billion dollars. That’s about seven thousand 

dollars per household. And because so many people have lost their jobs over the last 

3 years, more and more Americans are having trouble paying their bills. Our economy went into a recession in March 2001. 

In part because of overly aggressive marketing by the credit card industry, more 

and more Americans have tried to make ends meet in a bad economy by borrowing. 

And now many of them are in trouble. 

When they get in trouble, many of them turn to non-profit credit counseling companies for help. The problem, as it turns out, is that some of the largest credit counselors have the same management as for-profit debt consolidation firms. The nonprofit counselor steers people with credit problems to the for-profit consolidator. 

Given such a scenario, it’s difficult to imagine that the counseling being given is 

truly objective and always in the customers’ best interests. I look forward to learning to what extent the business ties between the counselors and the consolidators 

are made known to the customers desperate to work out their debt problems. 

The Subcommittee has learned that some of these ‘‘non-profits’’ pay their officers 

excessive wages—in one case as much as $624,000 a year. 

And the Subcommittee has learned that representatives of some non-profits deceive their customers with hidden fees and deliberately make promises they know 

88

they cannot keep with regard to lowering monthly payments and improving credit 

scores. 

We’re talking about an industry with one billion dollars in annual revenues. 

Mr. Chairman, I certainly don’t want to indict the entire industry. There are 

counselors and consolidators who are truly helping customers dig out from a mountain of debt. But there is enormous cause for concern here in Congress when 9 of 

the top 15 non-profit credit counselors—whose firms account for 40 percent of that 

one billion dollars—are being investigated by the Internal Revenue Service. 

We need to sort out the ‘‘bad apples’’ in this industry and I think this hearing 

is a useful first step in that process. 

Thank you Mr. Chairman.

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