Credit counselors moving mountains of debt Nonprofits help people set up repayment plans
Star Tribune
November 1, 1998
By Terry Fiedler

Tiff Worley pulls out his wallet and flashes a $1 million bill.

"It's real," he jokes. "You can tell by the Statue of Liberty on the front."

Worley knows something about money. His Roseville firm's credit counseling services are increasingly in demand in a marketplace struggling to stay afloat.

Metropolitan Financial Management Corp. has doubled its revenue each of the last three years, to reach a projected $4 million this year, Worley said. And he's expecting another doubling next year.

The nine-year-old nonprofit firm employs 65 people, most of them in Minnesota, and has offices in six states.

Metropolitan was the largest provider of debt repayment plans to Minnesotans of any firm monitored by the state in 1997, with more than 3,000 clients at the end of that year and about $8 million disbursed to creditors.

Firms without offices here aren't audited by the state. As a group they are estimated to have a small minority of the Minnesota market.

Federal legislation is being considered, and has some chance of passing, that might automatically channel more people through credit counseling before they could consider bankruptcy. In that case, "all bets are off," Worley said. "We would be inundated."

So far, it's the courts that are seeing the flood. Easy credit and related problems led about 150,000 people to enter into debt repayment plans last year and 200,000 are expected to do the same this year. In contrast, a record 1.3 million Americans will enter bankruptcy this year.

About 20,000 Minnesotans filed for personal bankruptcy last year, about three times as many as entered debt repayment plans. But firms like Worley's are doing their best to wrestle the debt-burdened from attorneys, who would put them through bankruptcy, and home equity lenders, who would refinance their debt.

Large creditors glad to bear the costs of credit counseling

About 40 percent of the people who contacted Metropolitan Financial ended up with debt reorganization plans carrying lower interest rates and lower monthly payments. Others ended up in bankruptcy or went elsewhere. Some clients don't pay fees or generate any other revenue, but are served under Metropolitan's nonprofit charter. By law, all credit counseling firms in Minnesota must be nonprofits, and most nationally are as well.

Debt repayment plans are offered with the encouragement of some very interested third parties with names like Visa and MasterCard. The largest creditors have so much at stake they gladly bear the cost of most of the counseling in the form of a so-called "fair share" payment to counselors that represents 10 to 12 percent of clients' payments. About a third of the clients' payments are to creditors who do not pay fair share.

Fair share payments generate about 85 percent of Metropolitan's revenue, and the bulk at most credit counseling firms. Most of the rest comes from client fees.

Much to gain

Worley acknowledged that creditors have much to gain from debt repayment plans, not only because they collect much more in a bankruptcy, but also because they can retain a client - it's increasingly expensive to find new ones.

"The mechanics of what we do are straightforward," Worley said. "People who need our assistance can't pay for it. The funding has to come from someplace."

Advocates say the primary benefit, besides not having a bankruptcy on your credit record for seven to 10 years, is that clients are both counseled to change bad credit habits and put on a plan that accelerates principal repayment.

People may file bankruptcy, Worley said, but "is there anything that helps them deal with any of the conditions that led to bankruptcy? No. We can give them a significant spending plan to keep them solvent."

Credit counseling firms see people from their teens up to their 60s and 70s. "The only commonality," said Wayne Wensley, president of Consumer Credit Counseling Service of Minnesota, a major player here, "is that they have debt of 75 percent or more compared to income, not including their mortgage."

The reason a growing number of people are in financial distress at a time of relatively low unemployment is simple: "Consumer debt is running higher. It's not just credit card debt," Wensley said. "People are buying more homes and paying more than they used to for vehicles. We focus on credit card debt because it isn't vital" to basic needs.

Wensley said his firm is growing steadily, though many people have turned to home equity loans to consolidate their credit card debt. He calls home equity loans dangerous because the debts can't be restructured if they go unpaid - clients just lose their houses.

'Off the charts'

Jerod White, regional manager of Omaha-based Credit Advisors' "growth is off the charts. In the last six to eight months' business we've doubled in size in Minnesota."

A growing source of business is younger people, he said, because credit card companies are targeting them and they often have an inflated view of what they will earn after college.

New graduates "have rent or a mortgage, a student loan and credit cards," White said. "Twenty-five thousand (dollars) a year is not going to cover it. They need a way out."

Worley of Metropolitan said there's a common misconception that there is no way out except bankruptcy, when in an hour's session on the hone or in person a debt plan can be established to satisfy the debt within two to four years. Even just keeping up with credit cards with the minimum monthly payment is a daunting task that can take 10 to 12 years with a final payout 4 to 41/2 times the original amount borrowed.

The difference, of course, is that creditors will reduce interest rates and rework other terms as part of a debt repayment plan, a much more palatable option to creditors who often get nothing in a bankruptcy proceeding.

Three out of four Metropolitan clients in the Twin Cities get their initial consultation in the office. After a detailed report is completed by the client and an up front charge of $25 is paid, the firm handles all creditor communications as well as disbursing funds for the client. There's about $10 to $15 in monthly fees or handling.

Two Twin Cities clients of Metropolitan Financial, both of whom didn't wish to have their names used, represent part of the range of circumstances that lead people to counseling. Both were adamant before they approached any firm that they wanted to reorganize their debts rather than file for bankruptcy.

In one fairly typical situation, a young woman working in the travel business found that credit cards got the best of her. At one point she was juggling payments, using one card to pay off another in an effort to reduce her overall rates with introductory, low interest offers. Ultimately she grew weary of late fees and interest rates that quickly popped up near 20 percent.

The late fees ended and her overall interest rate was lopped in half in her debt repayment program (creditors determine how much of the interest they will forgo, according to circumstances).

Changed perspective

She's two years into a program with another two to go, but from the beginning she was happier. Counseling "took only about an hour, but it changed my whole perspective. It helped me to deal with the problem to put it on paper."

Another Twin Cities woman ran up credit card debt to help her sister's medical bills, then endured her own hardships, including a divorce and losing her job.

She regards Metropolitan as an "advocate," particularly for interceding with harassing calls from a collection agency that routinely left her in tears.

Her payments are now a third less, and she said she is "making real progress" in paying down her debt.

Metropolitan claims that 65 percent of the firm's clients complete or assume debt repayment programs. The national average is about 45 percent.

Statistics are persuasive, but most often a client is either won or lost in the first contact, Worley said. That's why Metropolitan tracks its first contacts and said most clients get a person to talk to immediately.

"You are only as good as your last phone call," Worley said.

Worley, a former college sociology major, spent most of his career in medical products, as a 3M marketing manager and then as president of two Twin Cities companies, Bioplasty and Felas Laser, a firm that went out of business. Now 52, Worley was looking for a job that would provide him more time at home with his son because he was a single parent.

Treated like clients

He also was looking for something that might help people. In 1989, he started in credit counseling after a friend ahs been treated disrespectfully while seeking credit help. Worley said he figured that there was an opportunity for a firm that treated debtors like clients.

For three years he took no salary, living form savings and outside income. The latest filing with the state shows that Worley's business isn't making him rich - he drew a $40,000 salary in 1996 and about $60,000 in 1997.

That's bound to grow with the business, but there has been other compensation.

"I've never met anybody who doesn't feel good about this business," Worley said, "It's nice helping people. From every standpoint, it's a wonderful consumer business that has been overlooked or obscured."