Another article as part of my research into the history of debt relief. I’ll let you read the article and try to guess what year this was written. You’ll find the answer at the bottom.
Those Schemes to Help You Pay Your Bills
Some are on the level, some are rackets. How they work, and what to watch out for.
You have finally finished paying the monthly bills. You have managed to fight off an uneasy feeling that what with the payments on the car and the loan you made to buy the washer, the bills are getting a little ahead of you. And as you settle down with the evening paper, your eye strikes an ad that makes you sit up and take notice. It reads something like this:
WHY WORRY ABOUT BILLS?
WE’LL PAY THEM FOR YOU!
One low monthly payments takes care of
everything. No endorsers, no security, no
credit investigation. Not a loan company.
Phone for appointment today.
Sounds almost too good to be true, doesn’t it? You’re right. It is almost too good to be true. Before you can even consider picking up the telephone to make inquiries, there is a lot you should know about the type of business the advertiser is engaged in. And if it should be by any chance turn out that he might be able to perform a useful service for you, there is a lot you should find out about his particular company before you hire it to help solve your credit problems.
The field in which it operates has, during the past year or so, proved a gold mine for chiselers, racketeers and fast-buck operators of all types.
The debt-adjustment business
The firm that placed that ad is known technically as a prorating company, or a prorater. Popularly such firms are often called debt-adjustment companies, debt poolers, debt counselors or (particularly amount themselves) budget services. Prorating works this way:
A person finds himself saddles with a load of overdue bills and debts. Creditors are pressing for payment, perhaps threatening repossessions and garnishments. He takes his problem to a prorater. The latter, after an analysis of the debtor’s income and expenses and a counseling session on the household budget, has his customer sign a contract naming the prorater as his agent to handle the debts. The customer agrees to pay a specified sum once a week, or once or twice a month, on specified days for a specified period of time.
The prorater, in turn, is to talk to the creditors and persuade them to accept scaled-down but regular payments on the customer’s account. He is to divvy up the money paid regularly to him and make those agreed-upon payments to the creditors so that at the end of the period all the customer’s debt will be liquidated.
For this service he charges a fee, ordinarily a percentage of the total amount of the debts listed with him. The usual range is 6% to 17%. In addition he may require a flat service charge each month on each account, perhaps 10 cents to 15 cents a month per creditor and/or a nickel or dime per check written.
In some cases the contract simply contains an agreement to pay these charges. But in other cases the customer signs a note for the amount of the fee, which is added to the debts to be liquidated. The prorater may collect his fee by withholding a portion of each payment made or a portion of the first few payments. He may hold the first payment as a deposit against the fee and collect the balance from remaining payments. The contract may or may not make provision for refunds in case the customer or the prorater cancels the arrangement before completion.
A prorater is supposed to pay off all the client’s debts in full. He is not supposed to negotiate settlement for an amount smaller than that owed. He is not supposed to buy the accounts from creditors at a discount. He is not supposed to function as a bill collector.
What’s the catch?
In Chicago a prorating firm, together with some of its officers and promoters and a couple of associated companies, was indicted on a charge of fraud. A debt adjuster in Peoria, Ill., is awaiting trial for embezzlement. In Boston debtors swarmed into the district attorney’s office to complain that a prorater was pocketing their payments and turning over little or nothing to creditors. In Philadelphia a prorater was convicted of “unlawful collection agency practices.” In Kansas City, Toledo, Columbus, Akron, New York, Baton Rouge, in cities everywhere, better business bureaus have been deluged with inquiries and complaints about proraters, based on everything from misunderstanding to misappropriation.
An out-and-out crook can, of course, simply set up business, collect a few payments, put them in his pocket and slip. But most complaints stem, not from larceny or embezzlement, but from practices that are within the law–or at worst, so close to the line that it takes a court to determine which side they fall on.
A man signs a contract with one of the unethical proraters, agreeing to pay a fee of $100 to have about $1,000 worth of debts liquidated at the rate of $50 a month. After making two payments he finds that his creditors have received almost nothing and are pressing him harder than ever. Upon inquiry he learns that his payments were applied against the prorater’s fee. When he complains, the prorater cheerfully cancels the contract and keeps the fees collected to date, since the contract makes no provision for refund. Or perhaps the customer is three days late making his third payment. The prorater points to a clause in the contact allowing him to cancel the agreement and collect his fee in full if a payment is not made when due.
A couple of Ohio proraters had clients sign notes for fees. If the clients dropped our of the “budgeting plan,” notes were endorsed to an employe or to a company operated by the prorater/s lawyer and judgments obtained in court against the clients.
In other cases creditors refused to deal with the proraters, and the plans could not be carried through. Nevertheless fees that had been paid were not refunded, and payment of unpaid portions was demanded.
In the case of the Chicago company indicted for fraud, the contract provided for a small life and health and accident insurance policies to cover the amount of the debts, a provision allegedly used to siphon off money to companies connected with the prorating firm.
Misleading or fraudulent advertising has been a headache in many cities. Ads have implied that a free loan will be made, or have proclaimed that you can “forget your debts.”
Aside from such chicanery, there are obstacles that beset clients of even the best-intentioned debt-adjustment companies.
For one thing, signing a contract with a prorater does not relieve the debtor of responsibilities for his debts in the slightest degree. He cannot transfer his liability. The debts are still unpaid. One consequence of this is that no creditor is obligated to approve the prorater’s plan or even to accept money from him. Loan companies, banks and credit unions are particularly reluctant to deal with such firms. In a survey conducted by the St. Louis Better Business Bureau, 70% of the merchants queried said they refused prorating arrangements. A creditor may at any time go ahead with a repossession or a wage attachment. Even if a creditor does string along with the plan, he may insist upon maintaining direct relations with the debtor in order not the compromise his own rights or run afoul of the state’s consumer-credit laws. Thus it is quite possible for the debtor to keep on getting bills and overdue notices and phone calls even while his accounts are being handled by the prorater.
Paying off debts in this way adds to total debt. To the amount the debtor already owes, he immediately adds a new debt, the prorater’s fee.
Consider, too, that the only way a plan can be made to work is for the prorater to press for payments just as insistently as the creditors. The demands may be scaled down, but they must be met regularly.
There is a warning in the fact that a large number of the debt poolers’ customers do not go through with their programs. Some of those who drop out are people who have kept up with the plan long enough to work their debts down to manageable size and then simply take over on their own. Others, however, just don’t keep up their payments, or they find that their creditors won’t accept the prorater’s offering. They abandon the plan, and since the entire fee is hardly ever refunded, they have simply thrown money away.
Finally, there is a real hazard in the fact that the debt-adjustment companies are rarely subject to state regulation or supervision. Minnesota has a law that requires them to be licensed and bonded but provides very little regulation otherwise. Some states have made use of generalized statues: Pennsylvania has used collection-agency laws to crack down, and California has turned to a law governing the selling or cashing of checks. But nowhere are debt poolers subject to the strict control that most states exercise over the charges, advertising and operations of the banks and small-loan companies. Some state legislatures have recently been wrestling with the problem of whether to regulate prorating or outlaw it.
Is it all bad?
Is there any such thing as a good prorater? Can such firms ever perform a useful, worth-while service? Many legal and consumer-credit experts answer with a categorical No. Others are skeptical.
Nevertheless prorating is an old business, not a new one. A handful of firms have been operating in the field for as long as 30 years and are established, respected members of their local business community. There are firms with solid reputations in Minneapolis, St. Louis, Chicago, Cincinnati and other cities. Two better business bureau officials experienced in dealing with both established and fly-by-night operations have stated flatly that such firms can perform a legitimate service under the right circumstances.
Take on of these reputable organizations. It has been in business 33 years. The proprietor’s average customer makes a little less than $300 a month, with which he is trying to handle debts totaling about $2,100 owed to 20 creditors. His average repayment plan requires the debtor to hand over about $71 a month, roughly a quarter of his earnings to liquidate the debts over a period of about 2 1/2 years. His staff gives the customers a thorough job of budget counseling and plans each repayment schedule on an individual basis. Through his status with local credit men, he keeps his clients from slipping further into debt while they are under contract. He deals with his customers on a basis that one investigator described as being virtually private-enterprise social work.
But the cost of such service, as he is the first to point out, is far from negligible. His fee is 17% of the listed debts ($25 minimum) plus 17 cents a month per creditor plus 6 cents per check written. On the average account described above, that could come to as much as $400 or $500 total. Other reputable services charge less. A straight 10% is not uncommon.
What does the debt-adjustment company sell at these prices? Not freedom from debt, for all the debts are still there. Not use of money, for no loan is made. Instead, the best of the proraters are selling these intangibles:
- a negotiation service to make arrangements with the client’s creditors and plead his case;
- counseling on budget problems and advice on handling messed-up family finances;
- the convenience of making one regular payment at one place;
- a crutch for the client’s own will power and sense of responsibility.
Are there other ways out?
A pretty good case can be made for the contention that there are people who benefit sufficiently from a debt adjuster’s aid to justify what they pay for it. But are you one of them? Ask yourself whether your situation is such that you need to buy those services in order to solve a debt problem–or whether you could better solve it through one of three other possible methods of debt consolidation.
The first is a do-it-yourself plan. When you get behind with your debts, always the best thing to do is to go straight to your creditors and lay your problem on the line. If you are really sincere about working out from under, you will find that most creditors will meet you halfway. Admittedly it may be tough to get them to accept an over-all month-by-month plan, since each will be chiefly interested in collecting his own debt. You can hire a lawyer to negotiate for you, though, often for less than you would be pay the best of proraters. And if you are in real need, of course, you can turn to your legal aid society.
For the truly disaster-ridden there are in most cities civic, social or governmental agencies that can help settle debt problems. A noteworthy example is the system of municipal court trusteeships provided under the laws of Ohio. A debt-loaded citizen can get the court to act as a trustee for him; he will receive services almost identical to those offered by proraters plus certain legal safeguards. The cost of a trusteeship is $2 plus 10 cents per creditor plus 2% of each monthly payment.
The Council of State Governments has been doing preliminary work on a proposal for a standard state law that would provide somewhat similar trusteeships in any state adopting the legislation. The same proposal would seriously restrict all other prorating activity–in effect, virtually ban commercial debt pooling.
Finally, you can turn to the most common method of debt consolidation, borrowing. Borrow the sum necessary to pay off all the scattered debts and exchange them for one single obligation repayable in monthly installments to one creditor. The cost could equal or exceed what a prorater would charge, but there is a big difference in what you get. All those overdue debts are paid off in full at once. This is by far the best way to consolidate and liquidate a parcel of overdue debts. Small-loan companies and credit unions make many such loans; banks make them also, but in a smaller proportion. Many responsible lenders provide budget counseling, too.
There can be difficulties, through. One is that many of the people who are in deep enough to consider using a prorater are such poor credit risks or owe so much that no one can lend to them. The other is that once you have borrowed, you have to steer clear of the temptation to start overworking your credit again before the loan is repaid. If you don’t, you are likely to find yourself staggering under a new load, with the debt-consolidation loan as just one item in it. Significantly, an analysis of 3,000 debts of the customers of one reputable prorater showed 274 owed to small-loan companies, 249 owed to banks, 68 owed to industrial loan companies, and 64 owed to credit unions.
Sure you need a prorated?
If you must deal with a prorater, be careful. Check with your better business bureau first. Ask for references, particularly among credit people. Read the contract with an eagle eye. Make sure you know exactly what the charge will be and what the terms of the deal are. Make sure that early payments will not all go for the fee, while your creditors wait. Make sure that you will not have to pay more than a nominal fee if your creditors don’t accept the plan.
Above all, stop long enough to consider this observation made by a business man who has followed prorating operation closely:
“Most of the clients of debt adjusters are of a poor level of personal responsibility and probably would not be in trouble if they had more competence and the will to succeed. A large portion are below the level of credit where they can get further merchandise or additional loans. But some people get into debt-adjustment offices who should be able to make a loan to pay their bills and probably, with a little will power, could pay their own bills without even making a loan.”
The former class provides the bulk of the clients of reputable proraters and the victims of unscrupulous, cynical or crooked ones. But are you perhaps in the second class? If you have a pressing debt load, can it be solved by some straight talk with you creditors, by pulling yourself together, or by consolidating the debts through a loan?
Only if the answer is No do you need to take a second look at that ad.
Answer: September, 1955. Kiplinger’s Personal FiannceThose Schemes to Help You Pay Your Bills by Steve Rhode