COMMERCIAL: Are you overwhelmed by debt? Are creditors breathing down your neck?
JEFFREY KAYE: For years, ads from outfits promising credit relief.
COMMERCIAL: My credit card debt was outrageous.
JEFFREY KAYE: And debt assistance.
COMMERCIAL: How much credit card debt do you owe?
JEFFREY KAYE: Have been everywhere.
COMMERCIAL: Get out of debt and on with your life.
COMMERCIAL: Borrowing power.
JEFFREY KAYE: The credit counseling industry was born in the 1960s. It was financed mostly by major creditors -- banks and credit card companies -- as a way to recover debts. As consumer debt skyrocketed in the '80s and '90s, unscrupulous players seized opportunities.
The billion-dollar credit counseling industry has been scrutinized by Congress, and sued by federal and state regulators. The new bankruptcy law, signed last month by President Bush, will generate even more business for the troubled industry.
The new law requires debtors to get financial counseling before and after declaring bankruptcy. Consumer advocates worry there won't be adequate policing of counseling agencies.
TRAVIS PLUNKETT: There are legitimate, honest, good credit counseling agencies. But this bill does not do enough to keep consumers from falling into the hands of the scam artists.
JEFFREY KAYE: Travis Plunkett, legislative director of the Consumer Federation of America, has catalogued a wide range of scams.
TRAVIS PLUNKETT: Agencies that charge so-called "voluntary" fees that aren't voluntary; agencies that don't offer good quality credit counseling to consumers, they simply shove people in credit card consolidation plans.
JEFFREY KAYE: Kale Kelly and his wife, Trisha, have advice for people in need of debt counseling: Don't be fooled by promises.
KALE KELLY: The promises of great things that are to come if you are to pay this one small fee, all these "Your whole life's going to change, you're not going to believe it."
JEFFREY KAYE: The Kellys owed about $5,000. With six children, bill paying can be daunting. But like many Americans in debt, they were behind mostly on medical bills. Early last year, they turned to Master Credit Corporation, a Los Angeles company that promises to help clients fix their credit reports and get out of debt.
KALE KELLY: They told me it was $1,200. And pretty much the way they explained it was that they would go ahead and mail out letters and do all the footwork for you to get the derogatory stuff off your credit.
JEFFREY KAYE: Trisha Kelly thought that was too good to be true.
TRISHA KELLY: I didn't believe that it was possible for them to just magically erase everything off your credit without you doing anything.
JEFFREY KAYE: She was right. Twelve-hundred dollars and nine months later, the Kellys' credit score hadn't improved, and Master Credit wasn't returning phone calls.
KALE KELLY: I finally had to sit down and draw up a letter, a threatening letter more or less, and mail it to them.
JEFFREY KAYE: Eventually, Master Credit -- a tax exempt, nonprofit organization -- refunded their money. Scott Houston worked for Master Credit in 2003. Now a salesman in a San Diego adult bookstore, his title at Master Credit was "counselor," a job he admits he was unqualified for.
SCOTT HOUSTON: It was on-the-job training, so to speak. But no, I wasn't professionally trained as a credit counselor. Just how good of a salesman was the main thing.
JEFFREY KAYE: Houston was paid on commission; the more he sold, the more he made. The $1,200.
SCOTT HOUSTON: We would tell them not to pay their bills, basically.
JEFFREY KAYE: In addition, Houston says, clients would get an informational booklet and Master Credit would indiscriminately dispute credit report items -- a hit-or-miss proposition.
SCOTT HOUSTON: And we were to relate it to shaking a tree with a bunch of apples on it. The first time you shake that tree a bunch of the apples fall off.
JEFFREY KAYE: Houston says with some counseling, customers could have easily done for themselves what Master Credit did.
SCOTT HOUSTON: I think $1,200 was too much to pay for what they were actually doing, yes.
JEFFREY KAYE: Master Credit owner Tim Clark would not be interviewed on camera. On the phone he said his company has lowered its fees, offers counseling, disputes only inaccurate credit reports, and never advises customers not pay debts.
COMMERCIAL: AmeriDebt is a nonprofit organization.
JEFFREY KAYE: Many credit counseling agencies trumpet their IRS-recognized nonprofit status. The new law requires that agencies that counsel bankrupt debtors be nonprofit and approved by U.S. Trustees, a branch of the Justice Department. But regulators say: Debtor beware.
MARK EVERSON: The credit counseling organizations -- they've been a mess.
JEFFREY KAYE: Mark Everson, commissioner of the Internal Revenue Service, says many nonprofit credit counseling outfits are in league with profit-making firms.
MARK EVERSON: We have over half of the industry under audit now, in terms of revenues. And we've issued proposed revocations, or actually revoked the charitable status of about 20 percent of the industry. That shows how seriously out of line many of these organizations have become.
COMMERCIAL: Debt-Free is a nonprofit organization that really cares about you.
JEFFREY KAYE: One of the largest nonprofit credit assistance outfits in the country is Debt- Free, run by HMI, Help Ministries Incorporated, in Mesa, Arizona. It's a family affair founded by Richard and Leona Ellison.
He's president; daughter Glenda Hamilton is vice president. The organization says it promotes Christian-based lifestyles through its debt management program. Help ministries is recognized by the IRS as a nonprofit.
But the company that actually runs its debt management business is a for-profit, Debt-Free Arizona Incorporated, which is owned by a former help ministries board member, Matthew Golden. At the NewsHour's request, Plunkett looked over help ministries' tax returns. He found what he calls red flags.
TRAVIS PLUNKETT: The concern is that this is a shell operation, that it's not really a nonprofit, that's it's a for-profit in disguise.
JEFFREY KAYE: Nonprofit Help Ministries took in nearly $100 million between 2001 and 2003. Of that, about $95 million went to for-profit Debt-Free Arizona. As a private business, Debt-Free Arizona, located in Tempe, Arizona, doesn't have to issue public reports about it is spending.
Arizona records show the company and its owner are partners in the Scottsdale Gun Club, which opened last year at a cost of more than $7 million. As a tax-exempt organization, Help Ministries is supposed to work for the public good.
But between 2001 and 2003, less 1 percent of its income went for charity. It supported a Christian radio station in Romania, and it provided close to $300,000 to an organization run by Judy Ellison, the daughter of Help Ministries' founders. Her group sells products that promote meditation.
Representatives of Help Ministries Incorporated said their organization does not answer questions from the news media as a matter of policy. And Matthew Golden, owner of Debt-Free Arizona, did not return our phone calls. Consumer advocate Travis Plunkett says Help Ministries' clients are not getting what they're paying for.
TRAVIS PLUNKETT: After all, this is a credit counseling organization. My concern from examining this organization is that they don't spend a lot of time or money really educating consumers. What I see is an organization that's focused mainly on enrolling consumers in credit card consolidation programs and getting as much income as they can from that credit card consolidation program.
SPOKESPERSON: Que son tarjetas de credito?
SPOKESPERSON: Was it a bank check?
JEFFREY KAYE: By Design Financial Solutions, a 40-year-old organization, enrolls less than one-third of its clients in debt management plans. When Humberto Ruiz, Jr., walked into By Design Financial Solutions recently, it was his second in-person session with counselor Jonas Chesta.
SPOKESPERSON: When it's bold, it means that it's negative. It's negative, it's something past due.
JEFFREY KAYE: Ruiz is behind on credit card payments, and Chesta went over his credit reports. The sessions and reports cost $50. As a nonprofit, the agency prides itself on providing cheap, sometimes free, credit advice, says executive David Johnson.
DAVID JOHNSON: So we look at the budget, the total income, living expenses, the debt load, assets, liabilities, to see what is the true financial picture for this individual, and what can they do to change that picture. If just cutting some spending areas is going to correct the problem, then they walk out with a budget and some suggestions on how to manage cash flow, and they're good to go.
JEFFREY KAYE: Legitimate tax exempt agencies that counsel debtors should meet a key test, says IRS Commissioner Everson.
MARK EVERSON: Have they been counseled to change their family planning practices in the financial area to make sure that they're going to work their way out of debt?
JEFFREY KAYE: In addition to IRS scrutiny, the Federal Trade Commission has taken action against 70 companies in the last ten years. But much more needs to be done, says consumer advocate Plunkett.
TRAVIS PLUNKETT: The industry is in a state of flux, in a state of turmoil. So we have a situation where the new cops are on the beat, but the bad guys aren't yet in jail.
JEFFREY KAYE: So to those people who say that the enforcement has been inadequate, your answer is what?
MARK EVERSON: I agree.
JEFFREY KAYE: You'd like to do more?
MARK EVERSON: We need to do more, and we are increasing our audit resources going after looking at the problems with exempt organizations by over 30 percent over a two-year period.
JEFFREY KAYE: Regulators say before signing on with any credit counseling agencies, consumers should check the services, fees and reputation.