As lenders increasingly depend on credit counselors to keep debtors out of bankruptcy, a debate has erupted about who should be giving the advice.

Consumer advocates and established counseling agencies agree that this is a human service most appropriately provided on a not-for-profit basis. But others accuse the nonprofits of hypocrisy. The business is lucrative, and directors of nonprofits are paid extremely well, critics say.

The controversy came to a head with the introduction of a bill in the New York Legislature that would let profit-making companies into the state's highly regulated credit counseling industry.

The bill languished after a key sponsor withdrew support, but the proposal is likely to return during New York's next legislative session and elsewhere as a growing number of debt management companies seek to cash in on a trend.

Record numbers of bankruptcies have spawned proposals in Washington that would make personal filings more difficult. So legislators regard credit counseling as an antidote.

A U.S. Senate bill would require consumers to get credit counseling in the 90 days before a bankruptcy filing. Sen. Jeff Sessions, R-Ala., introduced an amendment last year stipulating that these services be offered only by not-for-profit agencies.

The amendment seeks to prevent a "creative bankruptcy attorney who sees the opportunity and sets up a related credit counseling business" from taking advantage of the system, said John Cox, a spokesman for Sen. Sessions.

The House version of the bill also would require credit counseling before a bankruptcy filing, but it does not include the nonprofit limitation.

In New York, consumer groups and not-for-profit credit counselors prevailed against the bill that would have extended counseling privileges. Under current law, counselors must be licensed by the state and must be nonprofits. Some other states do not require licenses and do permit for- profits to compete.

Durant Abernethy, president and chief executive officer of Silver Spring, Md.-based National Foundation for Consumer Credit, said, "The industry grew up nonprofit for the classic reasons.

"This is a human service, and consequently the best interest of the client rather than the shareholder should be served," said Mr. Abernethy, who heads an umbrella organization for more than 1,500 nonprofit agencies nationwide.

Consumer advocates further argue that the profit motive produces greater potential for abuse.

Gary Klein, senior attorney at the National Consumer Law Center in Boston, said that a debtor who is more interested in filing bankruptcy than in working out a repayment schedule could approach a like-minded, profit- taking counselor and get a green light to file.

Mr. Klein said certain for-profits could simply certify that "the consumer has undergone the process in order to get into the bankruptcy system."

Mr. Klein disagrees with legislative mandates that force credit counseling on "consumers with a financial emergency." He calls the process "an unnecessary hoop."

New York State Sen. Hugh T. Farley, a Republican, contended that for- profit agencies are being unfairly maligned and that more open competition would fully determine who is offering the best services. His bill would repeal a decades-old state law that requires companies offering debt management services to operate as nonprofits.

Last week, a companion bill in the lower house was introduced and withdrawn on the same day by Assemblyman Stephen Kaufman, a Democrat, who said he was not aware of the "tremendous amount of opposition" to this legislation.

Peter Edman, a member of Sen. Farley's staff, said it is unlikely that the senator's bill will be voted on this year. A similar version was introduced last year by Sen. Farley and will be reintroduced next year, Mr. Edman said.

In a memo on his bill, Sen. Farley said for-profit corporations "can successfully, responsibly, and capably offer these services to consumers."

Mr. Edman said nine states allow for-profit companies to provide these services and that regulation and oversight vary from state to state. New York is among a handful that requires a license, in its case granted by the banking department.

The state bank regulator plans to tighten its control of this rapidly growing business regardless of what happens to Sen. Farley's bill, Mr. Edman said.

In response to questions on the issue, the New York State Banking Department gave a brief statement: "The Department is in favor of any action that provides additional consumer protection. That is not to say it is significantly inadequate at this point."

As consumer indebtedness rises, so have debt management services. In New York, 11 agencies have been organized since 1996. Previously, there was one agency with several offices.

A concern expressed in New York is the large number of unlicensed credit counseling providers who advertise in newspapers and circulars.

"If you do business telephonically in a state that requires a license, then you need to have a license," said Alan Franklin, head of American Credit Alliance, a not-for-profit agency with a New York license.

Cambridge Credit Corp. of Agawam, Mass., is the kind of outsider Mr. Franklin and others fear.

The company, which has offices in Hauppauge, N.Y., is the chief supporter of the contentious New York legislation. It hired a lobbying firm affiliated with the former speaker of the New York Assembly, Melvin Miller, and contributed more than $38,000 to Albany campaign accounts, according to news reports.

Cambridge obtained a New York license two years ago with the hope that it could change the law, said its general counsel, Paul M. Kaplan. Mr. Kaplan is a partner in the New York firm of Epstein, Becker & Green P.C., and teaches antitrust law at Fordham University Law School.

New York's 11 other licensed nonprofits mounted a fierce attack against Cambridge Credit. Budget & Credit Counseling Services of New York held a press conference last week with a prominent political activist, the Rev. Al Sharpton, and the New York Public Interest Research Group.

This month, the agencies distributed a report to the legislature, "Kicking New Yorkers When They Are Down: An Investigation of Cambridge Credit Corporation." The report contends that Cambridge Credit has an improper relationship with an attorney, Robert Henle, who advertises his debt management services in New York.

Mr. Kaplan said Cambridge Credit has a "contractual agreement" with Mr. Henle, but he would not provide details. Mr. Kaplan said the report "creates implications of wrongfulness where there is none."

The report says: "Cambridge is using Henle as a front to circumvent New York State law by earning a profit providing budget planning services." Under New York law, attorneys providing debt management services are exempt from the nonprofit requirement.

One provision of Sen. Farley's bill would require attorneys who work primarily with debtors to be licensed by the New York State Banking Department, which would subject them to the same scrutiny as credit counseling agencies. Opponents of the bill say this requirement was tacked on to broaden the proposal's appeal.

Meanwhile, an Albany attorney, Andrew Cappocia, has been fined nearly $1 million by various judges for filing frivolous lawsuits against creditors- including Citigroup-on behalf of his clients. According to news reports, Mr. Cappocia advised clients to stop paying creditors in order to obtain favorable repayment plans.

Credit counselors say this extreme case does not reflect how most attorneys handle themselves, but they say it points to the larger hazard of the profit motive.

Cambridge Credit wants to charge the same fees in New York that it does in Massachusetts, where it operates as a for-profit entity. In Massachusetts, the up-front fee is equal to the debtor's monthly payment schedule. For example, a customer with a $20,000 debt and 48-month repayment plan would pay $416.66 up front, according to Mr. Kaplan. New York law does not permit up-front fees greater than $60.

Cambridge compensates by giving clients who meet their obligations a rebate every six months. Clients get 50% of what Cambridge collects from lenders in return for their recoveries. Those charges to the lenders, known as "fair shares," are 10% of a debtor's payment.

Cambridge Credit says its rebates give borrowers an incentive to complete their programs and stay out of bankruptcy.

Cambridge Credit has been a member of the Better Business Bureau of Central New England since December. Barbara Sinnott, president of the bureau, said Cambridge has met the BBB's standards for membership and resolved all complaints against it.

But Ms. Sinnott said "there seems to be an acceleration" in complaints. Of 24 filings against Cambridge Credit, 21 were received in the last 12 months.

Mr. Kaplan, Cambridge Credit's attorney, said the company is not a member of the Better Business Bureau in New York. He said efforts are still afoot to pass Mr. Farley's bill this legislative session, but if that does not happen, Cambridge Credit intends to try again.

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