Debt counseling agencies, a bulwark against credit card default, are facing a squeeze in funding from card issuers.

Facing margin pressures of their own, card companies are cutting their payments to the agencies, known as "fair share contributions." In response, some in the counseling business say they may have to cut back on the programs they offer, which could reduce the benefits they deliver to the card industry and the public.

"The first thing to go with reduced funding is the education," said Howard S. Dvorkin, president of Consolidated Credit Counseling Services in Fort Lauderdale, Fla. "This just will encourage credit counseling mills, where the client is not benefiting at all."

At the start of the decade, bank credit card issuers generally paid debt counseling groups 15% of the sums recovered with their help. But in the early 1990s bank issuers generally began cutting that share to 12%.

Now the cuts are being taken further.

Citigroup, Bank One Corp.'s First USA division, and Morgan Stanley Dean Witter & Co.'s Discover card unit recently lowered fair share payments to 10%, from 12%.

MBNA Corp. has notified counseling agencies by letter that it will cut its contributions to 6%, from 10%, starting April 1.

In addition, the favorable annual interest rates on accounts placed in debt counseling plans, designed to encourage repayments and a return to fiscal health, are climbing.

In April, Discover will raise its reduced interest rate to 9.9%, from zero, according to Budget and Credit Counseling Services of New York, known as BUCCS. Bank One Corp.'s First Card raised its interest rate to 18%, from zero, for debt consolidators last November.

Brian Dalphon, senior executive vice president at MBNA, said the card issuer "negotiates (terms) individually with each debt counselor, and the terms vary."

Discover would not comment on its agreements with debt counselors.

MBNA recently informed counselors that its reduced interest rates would be a minimum of 15.9%. The Wilmington, Del.-based issuer used to settle for 10% to 12%.

Alan Franklin, president of American Credit Alliance Inc., a nonprofit debt counseling service with offices in New York and New Jersey, said it typically takes his clients four and a half years to pay off $14,000 of debt.

Durant Abernethy, president and chief executive officer of the National Foundation for Consumer Credit, an umbrella association for many counseling agencies, said a proliferation of new entrants has raised costs and forced lenders to react by lowering fair shares.

The availability of phone and Internet counseling has made it easier for people to get on debt management plans, and issuers did not expect the current rush to sign up for counseling and consolidation, Mr. Abernethy said.

"The budgets of the credit grantors in many instances have been blown," he said. "It's been a real pressure for them to write off a portion of the interest and pay a fair share contribution, so they're looking very closely at it."

Debt counselors claim the decrease in fair shares will at least force them to cut their educational programs and at worst put them out of business.

Mr. Dvorkin's Florida operation is one of 49 members of the National Association of Independent Consumer Credit Counseling Agencies, which view themselves as alternatives to the National Foundation establishment.

Mr. Dvorkin said the National Association will discuss the possibility of lobbying against the recent rate reductions. He estimated that "at least 40% of the independent agencies" are in danger of going out of business.

Stephen Brobeck, executive director of the Consumer Federation of America in Washington, said reduced funding for nonprofit counseling agencies could have severe repercussions.

"To the extent (card issuers) reduce their fair share payments, the bankruptcy rate will rise," Mr. Brobeck said.

Gerri Detweiler, education adviser to Debt Counselors of America, an Internet counseling service based in Rockville, Md., sees hypocrisy. "At the same time that creditors are trying to make it more difficult for people to file bankruptcy, by cutting their contributions to counselors they are making it easier for consumers to file bankruptcy."

People closer to the banks say the industry has responded responsibly to the economics of bankruptcy and collections.

"Issuers are starting to realize that they might be able to work out something with a cardholder in-house, where they don't have to pay a haircut to anybody," said Lee A. Spirer, a principal at Booz Allen & Hamilton in New York.

William F. Keenan, president of De Novo Corp., a Hockessin, Del.-based consulting firm, said, "If you look at MBNA, they don't even call it the collection department. They call it payment services. They feel they are equally qualified in counseling customers, and they do a very good job at managing the whole debt collection process."

Some debt counselors blame a new crop of shady agencies for forcing issuers to tighten their belts.

Though the vast majority of independent counselors are said to be fully ethical, the rise in delinquencies over the past few years has spawned a new breed of alleged fly-by-night operator more interested in quick profits than public service, charging astronomical initial fees to consumers and offering little if any counseling.

"Creditors have cut down on their contribution, because they started to see half of the people drop out of these programs every year and declare bankruptcy," said Mr. Franklin of American Credit Alliance, also an independent. "So they say these programs have no value."

He contended that the low retention rate comes from agencies that charge illegitimate start-up fees.

"If you've got a $200 fee in the first month, you most likely would drop out in the second month," Mr. Franklin said.

American Credit Alliance charges $3 a month with no other premium. The National Foundation members have 1,400 offices and 22% of them provide counseling services for free. The rest charge an average of $9 a month.

Luther Gatling, president of BUCCS in New York, said counseling agencies will be forced to seek grants from philanthropic organizations if they want to stay afloat without increasing costs for the consumer.

"A lot of good agencies will be driven out of business," he said. "Organizations will have to figure out how to stay alive if this is allowed to continue."

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