Credit Counseling Severely Wounded Under New New Court Ruling. Class Action Suits Expected.

Debt Settlement Companies May Want to Celebrate But Not So Fast. It Impacts Them As Well.

In a recent opinion handed down in Zimmerman v. Puccio it was determined that non-profit credit counseling organizations operate as a “credit repair organization” as defined under the Credit Repair Organizations Act (“CROA”). This is entirely bad news for all non-profit credit counseling groups.

This is not a new case. It has been winding it’s way through the courts since 2003 and it was filed by Andrew and Kelly Zimmerman against John and Richard Puccio (the defendants), Cambridge Credit Counseling Corp., Cambridge/Brighton Budget Planning Corp., Brighton Credit Management Corp., Cambridge Credit Corp., Brighton Credit Corp., Brighton Debt Management Services, Ltd., Brighton Credit Corp. of Massachusetts, Debt Relief Clearinghouse, Ltd., Cypress Advertising and Promotions, Southfork Asset Management Corp., and First Consumers Credit Management Corp.

Long since the time of this filing the Puccio control over Cambridge Credit Counseling was legally severed and Cambridge was able to restore itself to a compliant non-profit credit counseling organization and has fought hard to rid itself of the mess the Puccio’s made of the non-profit in the beginning.

In this case the Puccio’s, who then controlled a credit counseling group, had made statements that a debt management plan would help to improve or restore a consumer’s credit rating by participating in the credit counseling program. Statements at the time of Puccio control we also made that credit could be reestablished or rebuilt following participation in a debt management plan. Employees of the company told consumers their accounts would be reaged and that would help their credit.

In fact this part of the sales script from the case sounds very similar to that used by many companies, credit counseling or debt settlement, even today.

Sales script example from the case: “Our program is designed to help you get out of debt and improve your credit rating. You will reestablish a good payment history and improve your debt to income ratio. Over the course of the program your credit rating will improve.”

Statements like that are similar to those made in my recent undercover shopping calls to debt settlement companies as well. You can hear some of these calls below.

Real Undercover Calls With Promises I Think Run into Trouble as a Result of This Ruling

  • Can Debt Settlement Hurt My Credit?


    • Anything you do can impact your credit.
    • While you are in the program the credit score will drop a little bit but it rebounds faster than any other debt management program out there and it has the least impact. You’ll see it drop a few points. *
    • Score will be the same or better than when you started. *


    • 100% of our clients don’t make payments to creditors once they start the program.
    • Credit report will reflect negotiated $0 and you can have that removed. *
    • In six to eight months you should be back in good credit status. *
    • Program will help me to increase credit score more. *
    • You’ll get more offers for credit while you are in the program because it looks like you can afford more with reduced debt levels. *
    • The idea that I’d get more offers for credit after trashing my credit in the debt settlement program is non-sensical.


    • Once you stop payments to let the accounts go delinquent it will show up as some late pays.
    • Once we get your accounts paid off it will counteract it and your score will shoot right back up. *
    • Accounts will be removed from credit report. *


    • It will absolutely not hurt your credit. *
  • Will You Be Able to Help Me Increase My Credit After I Finish The Program?


    • After you get out of the program you have nowhere to go but up.
    • What is going to get you back up and getting you credit worthy again is getting your debt to income ratio back in line and that’s what we work on. *


    • Shows up with a real positive effect. *
    • Credit score shoots right back up and you should finish the program with a higher credit score. *


    • Credit score will be better than when you start the program. *
    • Our program helps you get your credit score up to where it is now or even higher. *

Non-Profits Now Cross The Boundary Into Credit Repair

Even though the CROA exempts non-profit 501(c)3 organizations the court said that the credit counseling group had “crossed the boundary from credit counseling into credit repair with their continued and insistent representations to consumers that their services could only help improve clients’ credit.”

The court concluded, “By improving credit behavior prospectively, a consumer aims to improve a pre-existing credit record, credit history, and/or credit rating with a more favorable record, history, or rating in the future. Thus, credit counseling aimed at improving future creditworthy behavior is the quintessential credit repair service.”

If you have inside knowledge of how a credit counseling program works, you will see the following court decision creates a real problem for all credit counseling groups. The court found when a credit counseling group “contacted clients’ creditors to try to negotiate “re-aging” of accounts, a process designed to improve credit scores by relabeling delinquent accounts as current” that created an issue of engaging in credit repair.

The court also said that simply putting a disclaimer in the client contract stating that “[t]he CLIENT’S credit rating is outside of the scope of this Agreement” is not evidence that the credit counseling company did not represent that it would improve a client’s credit rating. Apparently, the Puccio’s believed incorrectly that a credit counseling organization could represent repeatedly in advertisements, on its website, and in its employee scripts, that it would help improve clients’ credit ratings, but escape liability under CROA by inserting a disclaimer in its contract about the relevance of its services to the credit rating of its clients. The court says, “That is an implausible position which captures the duplicity of the Puccios’ enterprises.”

Interview With Cambridge Credit Counseling About This Ruling

I had the opportunity to interview Chris Viale, the president of Cambridge Credit Counseling, about this new ruling and how he feels it impacts the credit counseling industry.

I thought it was important for readers to be able to put this ruling into context and to talk about the history of Cambridge and the troubled past the modern day Cambridge separated itself from a long time ago. I talked to Chris Viale, the president of Cambridge Credit Counseling about the history of the group and the impact the recent ruling would have on the credit counseling industry.

I’ve divided the interview into two sections which you can listen to below.

Impact of Ruling on the Credit Counseling Industry
20100821-Ruling Impacts Credit Counseling

Implications of this Ruling

The following comes from Vendable Law Firm and their credit counseling specialist counsel, Jonathan L. Pompan, and Jeffrey S. Tenenbaum.

Many companies advertise and market their personal financial advisory services as having some relationship to a consumer’s credit record, credit history, or credit rating. Zimmerman calls into question Hillis and other cases that stand for a narrow reading of the definition of a credit repair organization and the distinction between purporting to repair or retroactively fix past credit problems (being credit repair) and purporting to improve credit in the future (not being credit repair). Further, Zimmerman raises the potential that virtually all services to contact clients’ creditors to try to “negotiate ‘re-aging’ of accounts, a process designed to improve credit scores by relabeling delinquent accounts as current” constitute credit repair activities that fall under CROA. As the First Circuit observed, “credit counseling aimed at improving future creditworthy behavior is the quintessential credit repair service.”

The First Circuit appears to leave scant room for credit counseling agencies that provide DMPs to consumers to fit outside of the scope of CROA. Moreover, in this line of cases, there already had been a decision that adopts a two-part test for bona fide tax-exempt nonprofit credit counseling agencies, requiring such agencies to: (1) be recognized by the IRS as being exempt from federal income taxation under section 501(c)(3) of the Internal Revenue Code; and (2) actually operate as a bona fide nonprofit organization. As a result, the First Circuit requires that a nonprofit that might otherwise be covered by CROA satisfy this two-part test in order to be exempt from the statute.

Put simply, the door is now wide open for class action lawsuits targeting credit counseling agencies – regardless of tax-exempt or nonprofit status – based on nothing more than the agencies’ provision of DMP plans (that are incidental to the education and counseling provided by the agencies). In other words, a plaintiff can make such an allegation against a bona fide tax-exempt, nonprofit credit counseling agency and then the agency must prove not only that the IRS has recognized its 501(c)(3) status, but that it is actually operating as a bona fide nonprofit organization if it wishes to be deemed exempt from CROA’s requirements.

In short, credit counseling agencies need to determine whether they can and should comply with CROA’s requirements, or whether they intend to rely on the nonprofit exemption. The latter can be an extremely costly (even if insurance coverage would be available), damaging decision, even if ultimately successful. While the FTC and state Attorneys General may not be lining up to bring CROA enforcement actions against bona fide nonprofit organizations, the plaintiff’s bar likely will be, especially because the per-client penalties for CROA violations are so high, and because they can recover their legal fees if successful.

While this case was poorly defended and involved egregious facts of alleged wrongdoing that bear no resemblance to the operations of present-day legitimate credit counseling agencies, including those of Cambridge itself, the court took a broad view of the definition of a credit repair organization and, as a result, the scope of CROA. Credit counseling agencies now face the unexpected challenge of an interpretation that brings them within the scope of a statute that was intended to apply to services completely unrelated to credit counseling.

The ruling heightens the risk, particularly for credit counseling agencies doing business in the First Circuit (encompassing Maine, Massachusetts, New Hampshire, Puerto Rico, and Rhode Island), that their activities, especially their DMPs and less-than-full balance repayment programs, may trigger coverage under CROA and give rise to class action litigation, forcing them – at great expense – to prove that they are actually operating as bona fide nonprofit organizations (in order to be exempt from CROA, particularly for what has transpired in the past), or, alternatively, to comply with CROA’s requirements prospectively. Of course, unfortunately, complying with CROA’s requirements going forward will provide no protection for what happened in the past.

Despite a stated exemption for tax-exempt, nonprofit organizations in CROA, the broad interpretation of the statute adopted by the First Circuit may, unfortunately, lead to a wave of litigation against legitimate nonprofit credit counseling agencies that provide invaluable assistance to consumers in financial distress.

If you think your credit counseling, debt relief or debt settlement group may need some guidance or assistance to navigate these troublesome waters, you may want to contact the following experts for help:

Jonathan L. Pompan

Jeffrey S. Tenenbaum

I happen to know Jeff Tenenbaum and he’s a good guy. I’ve just never met Pompan but I’m sure if he works with Jeff he must be a great guy as well.

You can read the full appeal here.


You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.

Do you have a question you'd like to ask me for free? Go ahead and click here.

Damon Day - Pro Debt Coach

I can always use your help. If you have a tip or information you want to share, you can get it to me confidentially if you click here.

Follow Me
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
Steve Rhode
Follow Me
See also  Nice Move by Chicopee Savings Bank to Fund Financial Literacy Project. Hat Tip.

3 thoughts on “Credit Counseling Severely Wounded Under New New Court Ruling. Class Action Suits Expected.”

  1. Credit Counseling is nothing like credit repair or Debt settlement, get real, the Attorneys are the preditors and they are stealing resources from these agencies under rediculaous statements of “credit Repair”. Taking money that would go back into community services and education to would provide financial help in these tough economic times to those who need it. Because the Credit Counseling organizations have structured Debt management programs of credit counseling and are built around education, support and creative solutions that enable the distressed consumer to pay back the loan obligation and might actually help improve over time the consumers credit rating they claim it is a form of credit repair. Agreed that no agency should make any claims as to whether a program will improve their credit but just because the clients situation gets better doesn’t mean they are practicing credit repair and that is what the attorneys are aledging.

  2. true, credit counseling services can do a little harm on your credit report and you won’t be able to get new credit and all of your accounts will be closed HOWEVER, if you are on of the millions of people who last year had their interest rates jacked up to 29-30% for no reason what so ever, then a credit counseling program will get your interest rates to a MUCH lower more manageable rate and you WILL see your balances drop over the course of a few months whereas you don’t see your balances drop with the 29% rate before credit counseling. so you as an individual have to make the ultimate decision: if you can’t handle your credit card payments anymore at 29% interest what do you want to do? do you want even more credit or do you want to make a sincere effort to pay off the balances at an 8% interest rate??? and, especially for those who cannot file for bankruptcy for whatever reason, these counseling programs might be a Godsend.

  3. I think most credit counslors are just as much crooks or even worse then most debt settlement companies. The fact they hide behind their “non-profit” status while many of their executives enjoy income well into six figures in my opinion is even more deceptive.

    In regards to credit, credit counseling affects credit in 2 ways and to my knowledge credit counselors don’t disclose this. 1. Credit counseling WILL affect your credit scores because your accounts will be CLOSED! You will lose all of your available credit which will reduce your credit score, unless all of your credit lines are already maxed out. 2. They need to disclose that your accounts will report that you are in a debt management plan and that it looks as bad as a bankrtupcy to other lenders. Most people don’t find this out until it is too late- they go to buy a car or refinance their house and are denied because of credit counseling.

    I also think they should be required to not only disclose that they are also paid by the creditors, but also how much each creditor will pay them. Wouldnt it be intersting if creditor A paid them a commission of 10% for a 12% interest rate and creditor B paid them only 2% but offered the consumer a 5% rate for example.

    I think credit counseling is good for a lot of people who need a little bit of help and far better than credit couseling if they can afford the program, but why are they allowed to get away with this stuff?


Leave a Comment