Victims of child identity theft and their parents are left with an obvious question when they discover the crime: Why would anyone grant credit to a child?

The answer, for those who find it, is perhaps even more infuriating: Creditors often have no way to know an applicant is a child. Lenders, for example, usually have no idea how old the rightful holder of a Social Security number is. The nation's credit bureaus often don't know either. 

A new Child Identity Protection program implemented by the Utah state attorney general's office and the credit bureau Trans Union may be able to change that.

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Believed to the first system of its kind, Utah parents can now register their children with the state agency, which will then pass the data along to Trans Union.  In turn, the credit bureau will place the child's SSN in a "high risk" database that warns potential lenders not to issue credit to applicants using that number.

 

"For the first time, parents can proactively protect their children from being victims of identity theft," said Richard Hamp, the assistant attorney general for Utah who helped create the program. "We're really excited about it."

The program is currently open only to parents in Utah, but both Utah authorities and Trans Union are already in talks with other states to make it available nationwide.

Prior to Utah's Child Identity Protection program, concerned parents couldn't do much to protect their kids' credit until after they suspected their kids' identities were stolen. Even then, the available options were often frustrating. Parents could ask a credit bureau if there was an open credit file using their kids' personal information and request that it be closed and the erroneous information expunged. If no credit file existed, they would receive an unsatisfying "no file" response, and be left to wonder if a criminal would open one in the future. 

Hard data on the incidence of child identity is hard to come by, because the crime can go undetected for a decade or more – until the child turns 17 and applies for credit or a college loan. But there are plenty of indications the crime is on the rise. A study released by fraud-fighting firm ID Analytics in 2011 found that 140,000 kids each year are hit by the fraud; another 500,000 sets of parents and children are "inappropriately sharing" Social Security numbers, hinting at an even more widespread problem, ID Analytics found.

Hamp was an early advocate of credit freeze laws passed by dozens of states that forced the nation's credit bureaus to offer identity theft victims to "lock" their credit reports from any applications for credit. Seeing the rise in fraud against kids, Hamp began working on legislation that would require the credit bureaus to let parents lock their children's Social Security numbers about two years ago.

"But Trans Union called and said they'd work with us on a voluntary basis. You don't need to legislate," he said. "I took them up on it."

Utah already had a leg up in creation of this kind of system, having launched its Identity Theft Reporting System website several years ago. Victims use the system, known as IRIS, to report the crime, and it includes a robust authentication system using various state databases, such as driver's license records. Hamp agreed to use IRIS to authenticate parents who wish to enroll children in an anti-ID theft program. That made Trans Union's part of the work much easier.

After Utah verifies the identity of the parent and collects a child's personal information, state authorities send the child's SSN and age to the credit bureau. Trans Union then places the information in its "high risk fraud database." If a child ID thief tries to use a kid's SSN while applying for credit, the lender gets a pre-programmed warning message.

"Initially I wanted a message that said, 'This number belongs to a kid,' but this allowed them to tap into a system they already had and get it done quickly," Hamp said.

Trans Union and Utah officials held a launch ceremony for the system in late January.

"We do recommend every parent enroll their children," said Steven Katz, senior director of consumer operations for Trans Union. "There is no downside to it."

Enrollment is free. Kids are automatically removed from the high-risk database on their 17th birthday, he said. Trans Union has agreed that none of the information entered into the system will be used for marketing purposes.

"The intention of this program is to assist parents and guardians in preventing ID theft among children, and that’s all the data will be used for," he said. Trans Union will consider sharing the data with the nation’s other credit bureaus, he said, much as the bureaus share fraud alert information now.

Parents who worry that Trans Union might misuse the data shouldn't allow that to keep them from using the program because "they don't give their kids' data to Trans Union, they give the data to us," Hamp said. "We retain all rights to the data."

The program isn't perfect, however. ID theft expert Linda Foley, who runs IDTheftInfoSource.com, said she's worried that the system only stops credit-based ID theft.  It's powerless to prevent creation of fake driving licenses, for example. Such a system risks "giving parents a false sense of security," she said.

Also, because so much of child identity theft is committed by parents, there's a fundamental flaw in the way the program is set up, she said.

"Since parents enroll kids, those stealing from their kids will not be interested in this opportunity. It needs to cover all children," she said.

Still, Hamp believes the Child Identity Protection system is a big step in the right direction, and he's urging all parents to consider it. Already, about 1,000 children have been registered, Hamp said. He plans on bumping up participation by partnering with school districts students can be registered en masse.

"I'm really excited about this," he said. "Instead of having to fight Trans Union, we came up with a mutually acceptable resolution. Is it perfect? No. Are there still going to be problems? Yes. But it's the best thing available for parents to protect their kids."

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Being jammed into a plane for 10 hours can certainly feel like being stuck in a foreign country. But that's not the reason Michael Rosen's U.S. dollars were rejected on a recent flight from Hawaii to New York.  As many travelers know, dollars — the physical kind — are useless once you board an airplane in most cases. You'll need plastic to buy a headset, a drink or a snack. Rosen, a New Jersey lawyer, thinks that's discrimination, so he's filed a lawsuit aimed at forcing airlines to treat greenbacks, and consumers who carry them, with more respect.

A New Jersey state judge will hear arguments Friday to decide whether the case has any merit. Rosen is likely to get support from consumers who seem lodged in an endless battle with the airline industry, but he faces an uphill battle in court.

The case began with a situation that captures a typical traveler's nightmare: stuck on a 10-hour flight with no form of distraction and no way to buy a drink or a snack. Rosen's attorney, Nathan Kittner, said Rosen few from New York to Hawaii on Continental Airlines last year and purchased a headset with plastic. He was told the headset would work on all future Continental flights. So when he boarded his return flight, he checked his credit cards in his luggage and took the headset with him. He got bad news as soon as he sat in his chair.

"It wasn't compatible with that airplane," Kittner said. "Now he's stuck for 10 hours." Rosen tried to pay $3 in cash to get a new headset, but the flight attendant wouldn't budge. No cash.

"This is not a small thing," Kittner said. "It was a very long flight."

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Most airlines went to cash-free cabins two years ago. Kittner thinks it's just another example of the industry forcing consumers to suffer through poor service.

"They feel like the airline deregulation act gives them enough authority to make their own rules," he said. "It doesn't seem they should be allowed to tell a passenger, 'Sorry, we can't take cash.' "

There are practical reasons airlines don't want to handle coins and bills at 30,000 feet. Flight attendants hate making change, and cash accounting is a hassle.

"But that shouldn’t be the consumers’ problem; that's their problem," Kittner said. "We hope to send a message to the airlines."

Rosen's case includes several claims — Kittner thinks Continental broke a contract with his client when the initial headset failed to work on the second flight, for example. The lawsuit also alleges false advertising and violations of the New Jersey Consumer Fraud Act.

On Friday, an Essex County judge will hear arguments on Continental’s motion to dismiss the case. Continental didn't immediately respond to a request for comment.

But the case raises important larger issues. Should consumers who don't have credit cards be barred from in-flight purchases? Some don't hold plastic for philosophical reasons; others may have poor credit and have been denied credit cards.

The airlines are engaging in "unlawful discrimination against individuals who do not physically possess a debit or credit card," the lawsuit claims, according to North Jersey News.

Consumers who use cash already face some tough treatment.  Paying in cash can cause added fees to kick in (see "Paying cash? That'll cost extra"). As firms experiment with blossoming new alternative payment mechanisms, such as cell phone payment, the potential for even more discriminatory policies will only increase. Starbucks, for example, now employs a smartphone payment system that serves as a digital gift card for iPhone and Android users. What if Starbucks began refusing all other payment mechanisms? What if other stores began requiring payment through Google's Android phone? That's farcical, of course, because market forces wouldn’t allow it; consumers would just spend their money at the nearest competitor's coffee shop. Few businesses can afford to turn down money.

But this competitive element makes the airline situation unique, Kittner argued. Consumers who don't like Continental's cashless cabins can't exactly get off the plane and spend their dollars at a competitor.

"You are pretty much a captive audience on the plane," he said.

The basic argument against cashless cabins is one you've probably already heard: that "U.S. coins and currency are legal tender for all debts, public charges, taxes, and dues." The language comes from the Coinage Act of 1965, but it has roots that reach back much further in dollar history.

The clause seems to indicate that someone owed a debt must accept greenbacks as payment. The Treasury Department, however, says otherwise — and with a clarity rarely found in U.S. regulations.

"There is ... no federal statute mandating that a private business, a person or an organization must accept currency or coins as for payment for goods and/or services," Treasury says on its website. "Private businesses are free to develop their own policies on whether or not to accept cash unless there is a state law which says otherwise.”

There are plenty of situations in which private businesses — and even government entities — dictate the way consumers can pay. Businesses can refuse to accept bills that are larger than $20, for example. Buses can accept only change for automatic fare collection machines. Plenty of parking garages or rental facilities require credit card payment.

Of course, the Treasury's clear-cut policy may not prevent a New Jersey state judge from finding a violation of the state's consumer protection law — or at least entertaining the larger case — and any kind of victory for Rosen may force airlines to reconsider their policies. He’s considering filing a class-action lawsuit over the cash-in-cabin policies.

At a minimum, the legal battle might inspire airlines to give flight attendants a little more flexibility when dealing with petty cash issues.

"All they had to do was be a mensch about it — say, 'We see you already bought a headset. Here's another one.' And this all could have been avoided," Kittner said.

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Comments begin below. As a reminder, insults and name calling are not welcome and will be removed. Adults can make a point without using words like "idiot."

Millions of Americans have been told their credit card terms are changing for the worse this year.  The only way to ward off the changes -- such as higher interest rates -- is to put the card on ice and stop using it.

Meanwhile, more than 100 million credit and debit card numbers have been stolen recently, and unauthorized credit or debit card charges hit nearly one in 10 consumers every year. This can make for a toxic combination.

Steve Abshagen got one of the unhappy notices from Bank of America in March, indicating his interest rate was going to jump from 9.9 percent to 14.95 percent.  Abshagen was a former MBNA customer until Bank of America acquired that firm's credit card users, and the change came as a surprise. While he carries a "five-digit balance" on the card, he says he's never missed a payment. BofA hiked his rate anyway, in a change that would have cost him about $850 more per year in finance charges.

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But Abshagen reads his mail carefully, and spotted the customary "opt-out" alternative offered by Bank of America.  He could decline the change in terms and agree to pay off his balance at the lower rate, as long as he never used the card again.  Abshagen took that option, mailed in his opt-out notice, and began using a different card for new purchases.

All was well until last month, when Abshagen received his monthly statement from the bank. His minimum payment had jumped by $75, and his interest rate was raised to 14.95 percent.

The reason? An unauthorized charge to his credit card.

Abshagen says he made a purchase at Amazon.com and while he entered his new card to
complete the transaction, Amazon accidentally charged his old card, which the site held on file from previous purchases. 

He noticed the charge immediately and had it reversed, but it was too late. That single transaction had triggered acceptance of the higher rate, according to Bank of America, and now he was on the hook for a 50 percent interest rate increase.

Abshagen got on the horn to Bank of America, but the company offered little help.

"The woman was pleasant and she told me she could request from another department that they lower my rate, but she could not promise anything," he said.  She couldn't even give him an answer, he says.  "She said that if the request was successful the lower rate would show up on my next statement." In the meantime, he'd have to pay his current bill, she said.

That seemed unfair to Abshagen, who didn't want to make the higher payment. He threatened to withhold any payment to the firm until the matter was resolved. The call ended in stalemate.

"I refuse to pay a cent on this card until I receive a note saying they've given me the lower rate," he said. "They're the ones who violated the agreement, not me."

When asked to investigate the matter by msnbc.com, Bank of America spokeswoman Betty Reiss told msnbc.com that she couldn't comment on individual consumer's accounts for privacy reasons.

She did say, however, that the bank's policy holds that unauthorized charges should not cause a customer's rate to increase -- and that Abshagen's lower rate had indeed been restored.

"If we determined there was a charge that is unauthorized we would reinstate (the customer's) opt-out status, which is what we did in this case," she said.

Abshagen said he received a call from a Bank of America representative indicating his lower rate had been restored a few minutes after msnbc.com's inquiry.

RED TAPE WRESTLING TIPS
Consumer Union attorney Gail Hillebrand said Abshagen was lucky to have a happy ending, mostly because he was diligent about reading his bills.

There are dozens of ways that consumers can lose their opt-out status -- and get socked by higher rates, she said.  Many consumers link automated monthly bill payments to their credit cards -- such as cable TV service, Internet service, or even mass transit system payments. Even one missed charge could trigger the higher rate. 

"That can be a pain. You find yourself asking, 'What's my login so I (can) stop payment?'" she said. "You'll have to know what all those bills are."

A refund credit to the card could also trigger new terms.  And of course, so could a thief's unauthorized purchase. Earlier this month, the Justice Department announced that a single suspect had led a crime ring that stole about 130 million credit cards, nearly one for every adult American consumer.  A study by security firm Gartner indicated that 7.5 percent of consumers were hit by ID fraud last year, with most victims of credit or debit card fraud.  Given the widespread prevalence of interest rate notices and identity theft, it's likely more consumers will find themselves fighting to restore their opt-out status, Hillebrand said.

"Just as a matter of decency, the bank should restore the rate in that case. Of course, with banks, you can't count on decency," she said.  Consumers in this situation should file an identity theft affidavit with the Federal Trade Commission and file a police report, and send a copy of both to the credit card company as a plea to restore the opt-out status and the lower rate.  She urged consumers to also write to the Federal Reserve, which is right now developing new rules for consumer rights when credit card companies change their terms of service, and recommend that the agency make it easy for consumers to avoid new terms and higher rates.

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Steven Lobdell points out an image on Chase bank's Web site that says "Welcome WaMu customers. We're here for you."

But, apparently not for him. Lobdell is one of a group of former Washington Mutual credit card customers who were abruptly dumped by Chase in recent days. He holds two Chase cards; both were canceled as of July 15.

"It's kind of ironic, isn't it?" he said. "I think Chase is two-faced....We were good enough for Washington Mutual, why not good enough for Chase?" Across the Internet, thousands of former WaMu customers are expressing the same outrage. They say Chase is dumping them as customers, despite their solid payment records.

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JP Morgan Chase & Co. acquired Washington Mutual and its troubled portfolio of credit cards in September, at the height of the banking system collapse. While Chase has recently set about to tidy up the ranks of its credit card holders, consumers are bearing the brunt of the cleaning. Two weeks ago, Chase began forcing some customers to raise their minimum monthly payments from 2 to 5 percent. And now, it's cutting off some customers all together. Thousands of complaints from former Washington Mutual customers can be found on personal finance blogs all across the Web.

Lobdell took a long and winding road to become a Chase customer. He initially opened his credit card with Providian Bank, which was later acquired by Washington Mutual in 2005, which collapsed last fall, and Chase picked up the pieces. 

Lobdell, who had combined balances on the two cards of about $3,000, says he's never been late with a payment and doesn't understand why Chase would cut him off.

 "When I got the letter I called to ask why the account was closed, I was told it was because of information received from the Experian credit bureau," he said. When he looked at his credit report, nothing seemed out of order. Lobdell said he will be allowed to pay off the card at its current rate, but can no longer make charges with it.

24 percent default rate predicted
Chase officials refused to comment specifically about the complaints from former Washington Mutual customers. Spokeswoman Stephanie Jacobson would not say how many card holders were impacted by this latest round of notices, but instead offered only a generic statement saying the bank was reacting to market conditions and new regulations from Congress.

"As a responsible, careful lender, we constantly evaluate the risks and costs of funding credit card loans. We are also evaluating changes required due to pending regulations," she said. "When necessary, we make changes to pricing, terms or credit lines based on borrower risk, market conditions and the costs to us of making loans. These are factors we have always monitored and processes we have consistently followed."

For additional questions, she referred reporters to the company's quarterly statements.

Washington Mutual was one of the nation's top 10 card issuers when acquired by Chase, with about 15 million cards. Still, its operations were dwarfed by the nation's largest issuers, including Chase. Former Washington Mutual consumers have about $25 billion in outstanding credit card loans, compared to Chase's $150 billion.

Lobdell was sure that Washington Mutual customers were being targeted. The letter he received contained the cryptic label "WaMuClosure1" at the bottom of the note.

He's seen notes from hundreds of other consumers in the same spot. "Reading these same stories, over and over, makes one wonder how Chase can get away with this."

A possible reason that Chase would pick on WaMu customers is contained in the company's second-quarter earnings announcement. While Chase said it anticipated losses of about 10 percent on its credit card portfolio, it predicted losses of up to 24 percent from its former Washington Mutual customers. Prior to its collapse, Washington Mutual targeted subprime borrowers, a group that's more likely to default on loans.

Losses of that size would be a shock to Chase's balance sheet. When Chase acquired Washington Mutual's assets for $1.9 billion last fall, it said it anticipated credit card losses in the 8 percent range. 

Lobdell holds other credit cards, so the cancellation does not put him in immediate dire straits. It will mess with his credit report for years to come, however. It now contains two notations that indicate "account closed at creditor's request." He'll get two dings to his credit score because his available credit has shrunk. 

"Now if I try to get a car loan, it's going to show they closed my accounts," he said. 

FICO: Not a negative event
Craig Watts, spokesman for Fair Isaac Corp. – which controls the credit formula – offered soothing words for Lobdell and others in his same spot. Watts says the "closed at creditor's request" notation is not considered a negative event by the credit score formula.

"We see it as the same as if the consumer closed the account," Watts said. In other words, it will not hurt credit scores the same way an account labeled "delinquent" or "settled for less than full balance."

Of course, consumers are advised never to close their credit card accounts, because the loss of overall available credit will hurt their scores – and in this case, consumers have no choice in the matter. So consumers who've had their accounts closed by Chase will see their scores lowered. It's impossible to say by how much, because multiple factors contribute to the score, Watts said. 

To make matters worse, if consumers cut loose by Chase open a new card to replace their lost Chase card, that'll hurt their credit score, too. * "If you go apply for a card, the impact to your credit score is you will lower your score a little bit, but over several months, it will recover," Watts said. His advice to former Chase customers: pay off existing balances instead, and wait to open a new card, if possible. Consumers who are really worried about the impact of losing their Chase account should pay to get their credit score, he advised. 

Lobdell didn't have his score before Chase dumped him so he really has no way of knowing what impact it might have on him, or the price he may pay for credit in the future. But there is good news for him -- he bought a home two years ago, so at least he doesn't figure to be in the market for a home loan any time soon. His mortgage holder? JP Morgan Chase.

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Econ4u.org seems like a happy place to learn simple lessons about money.  The Web site is full of smiling faces and quick, fun questions like: How long will it take to double your money if you are earning 5 percent interest? (14 years, by the way).

So what's a fun Web site like that doing in the middle of a bitter battle over the payday loan industry, or for that matter, the smoking industry?

Research commissioned by the Econ4u.org's operator, The Center for Economic and Entrepreneurial Literacy, has made its way into newspapers around the country – fewer than 1 in 5 members of Congress have any formal economics training, the organization said after a recent study.  The Wall Street Journal, The New York Times, Bloomberg, Reuters and dozens of papers have all cited the center's research.

Econ4u's owners say the site has a straightforward, noble mission: to "teach important economic concepts."  But while the site offers plenty of useful money basics, there is one oddity: information on controversial payday loans is unusually positive.

And more curious: The man behind the site is Rick Berman, a notorious Washington, D.C., publicist famous for taking up the cause for unpopular industries like alcohol and tobacco. In fact, many believe Berman –- who's known by opponents as Dr. Evil -- was the model for the lobbyist viewers loved to hate in the 2005 movie "Thank You for Smoking."

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The Econ4u.org Web site has appeared as Congress is on the verge of passing legislation that could severely restrict the $25 billion short-term loan industry, which has been under attack for many years. A law proposed by Sen. Dick Durbin (D.-Ill.) – the "Protecting Consumers from Unreasonable Credit Rates Act" – would cap payday loan rates at 36 percent annually, far lower than the current rate of 400 to 800 percent.

Econ4u.org is marketed most heavily in the Washington D.C. area, where it is hawked by bold advertisements in subway cars.  There, its puzzlers are printed on bright orange posters. But one of the fun quiz questions seems to be posed far more often than others:

If faced with an unexpected cash need, which of these options will typically cost the most?

• Bounce a check
• Get a short-term payday loan
• Initiate a wire transfer
• Pay credit card late fee

The *right* answer, the poster indicates, is bounce a check, which can cost twice as much as the other alternatives. A $100 payday loan costs $15, the poster says, far less than the average late fee or wire charge.

By itself, that might not cause the raising of any eyebrows.  But following the poster's instructions to learn more on the Econ4u.org Web site adds a bit more to the mystery.  Listed on the site's "About" page are merely a form for entering an e-mail list and a phone number. The name of an executive, or even a public relations contact person, isn't listed.

A Google search for the phone number unmasks the anonymity quite a bit. The number also appears on press releases issued by the Center for Economic and Entrepreneurial Literacy, belonging to a spokesman named Tim Miller.

Information about Miller is easy to find online. He has also worked for another Berman organization called the Center for Consumer Freedom. It supports industry efforts to oppose laws aimed at limiting access to tobacco, fattening food and alcohol.

Miller, meanwhile, wrote an op-ed piece last year titled "Payday Loans Help Many of the Poor," that appeared in The Wall Street Journal and was reprinted in several newspapers around the country. The letter, in which Miller identifies himself as a spokesman for the Center for Consumer Freedom, makes a case against limitations on the payday loan industry.

"Short-term payday loans are actually cheaper than similar financial products like overdraft fees, credit-card cash advances, or paying bills late," he wrote.

'Ambush education'

In an interview, Miller said that Econ4u.org is published by a nonprofit group headed by Berman that is concerned about the lack of financial education among consumers.  The Center for Economic and Entrepreneurial Literacy is a spin-off of the Center for Consumer Freedom, he said.

"As an organization, we'd like to advocate the need for increased economic education in schools," he said.  "Only three states have mandates for personal finance classes."

Miller said that Berman created the site "as a vehicle for (him) to talk about something that he is passionate about."

The quiz questions are part of an "ambush education" campaign that he said is more effective than traditional methods for teaching money lessons.  Television ads for the site have appeared around the country, he said, but poster ads are primarily appearing in Washington D.C.

"We have a lot of twentysomethings working in town, working in The Hill, that don't have a lot of economic literacy and they are making big decisions," he said.

He rejected the suggestion that the site is a subtle marketing tool for the payday loan industry.

"We have a lot of information on our site. I wouldn't know how we could favor one industry," he said.  Instead, questions involving payday loans simply indicate how bad some consumer other options are. "We're trying to drive home the silly mistakes people make.  Bank overdrafts are as raw a deal as you can get."

Miller said he didn't know where the funding for Econ4u came from, and he directed additional questions to Berman.

'Information isn't unbiased'

Berman's day job is running the Washington D.C.-based public affairs firm Berman & Company. He is best known as the paid defender of unpopular industries. He runs numerous nonprofit groups and media campaigns that target consumer advocacy groups, and has waged campaigns ridiculing efforts of groups that call attention to the dangers of smoking, drunk driving and obesity, among others. He has a celebrated rift with the organization Mothers against Drunk Driving.  Miller described him as a libertarian.

In an e-mail exchange, Berman said he had a policy of not disclosing supporters, but asserted that Econ4u doesn't receive money from the payday industry, and that his PR firm currently does "not have any payday lenders as clients."

He reiterated that Econ4u was merely a labor of love.  He did say that the Center for Consumer Freedom has a "long history of planting its flag in defense of consumer choices and attacking those who want to take them away."

Berman said his PR firm represents businesses against "activist attacks" by making "controversial, but factual, arguments to dispel many of the myths that are out there."

Econ4u.org,  however, is different, he said.  He pays for the site by himself, he said.

He called the lack of economics and finance knowledge among the American population "astounding."

"However, the information I put out isn't unbiased," he wrote. "It reflects the issues that I personally believe need to be addressed. The bank overdraft fees are one of the biggest scams running, and the reason we use that ad in the metro is because it's one of the questions that people seem most surprised by."

'A sock puppet'

The Center for Responsible Lending, a consumer group that has long advocated restrictions on payday loans, isn't buying that explanation.

"It's a PR firm's attempt to put a nice face on payday lending by couching it in terms of broader advice, said Ellen Schloemer, executive vice president of the agency. "They don't disclose who they are. There is no way an average consumer would know this is a sock puppet for a PR firm."

In Washington D.C., interest groups disguised as unbiased research organizations are sometimes called "astroturf" groups.  Schloemer dismissed Econ4u as the work of such an astroturf firm, and for evidence pointed to the keywords purchased by the site from Google's ad service – because keywords are purchased via auction, information about them can be gleaned by market research companies like KeywordSpy.com.  Schloemer pointed to that site's research on Econ4u.org, which shows about nearly 80 of the 97 keywords purchased by Econ4u.org's operators involve some variation of the words payday loan – terms like "instant payday loan", "military payday loan", or "payday loan Oregon" --indicating its owners are principally interested in getting their site in front of people looking for information on payday loans.

Schloemer said she had no problem with the firm taking out advertisements – and conceded that much information on Econ4u.org is useful – but said Berman's group should disclose its identity in the advertisements and on the Web site.

"I have no problem with them trying to advance their views, we do that too.  But it's not fair to consumers who are thinking this is objective advice," she said.  

Berman, however, insists the site is his own personal project, and he plans to work even harder in the future to improve the state of financial education in America.

"Our last round of advertising...was a round of national (public service announcement) focusing on mortgages and basic business economics. And I am exploring getting our information into public schools in D.C." he said.

Like anyone with a radio or TV, Lorena Altamirano heard the ads promising quick and painless debt relief. If there was a way to settle her debt for 50 cents on the dollar, she sure needed it.  A recent divorce had led to a nasty financial surprise: Her ex-husband's unpaid bills had pushed her almost overnight from having virtually no debt to being $17,000 in the hole.

"I was paying everything perfectly, no problem, until the divorce," she said. "Then the skies fell on me. These were bills he never told me about.  We were married and I was responsible, but that put me totally out of balance."

Altamirano still had a decent job as a benefits claims processor, but she was now living paycheck to paycheck.  With a son in college, and $1,600 a month rent for her San Mateo, Calif., apartment, she had nothing left at the end of the month to pay down the debt. The interest rates on her credit cards climbed, and the late fees started to pile up.

A friend had enjoyed great success with a debt consolidation loan, so Altamirano started researching debt workout plans on the Internet.  She quickly found Debt Remedy Solutions in Boca Raton, Fla., and sent an inquiry.  The response seemed like an answer to her prayers.

"We are generally able to settle debts for about 40 cents on the dollar and have our clients debt free in a very short period of time on a low monthly payment plan," said the letter, which Altamirano provided to msnbc.com. "We charge the lowest fees in the industry."

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Like most Americans with debt trouble, Altamirano knew nothing about the fast-growing debt negotiation industry, and did not understand the important distinctions between debt consolidation, credit counseling and debt settlement. She believed she was simply entering a payment program that would lower her interest rates and help her climb out of the hole she was in.

She missed the reference in the pitch letter she received – "We are generally able to settle debts" – that indicated she was about to trust her finances to a debt settlement company. She signed up, and began sending $200 a month to Debt Remedy solutions. A year later, the answer to her prayers had become a nightmare.

Rogue industry

 In May, New York Attorney General Andrew Cuomo announced an investigation into the debt settlement business, calling it a "rogue industry." Among the 10 firms that received subpoenas from Cuomo's office was Debt Remedy Solutions. Unfortunately, that came too late for Altamirano.

There are perhaps 1,000 firms that offer debt settlement services, according to the industry's lobbying group, The Association of Settlement Companies (TASC). About $20 billion in consumer debt is currently enrolled in debt settlement programs, according to the association.

 Ads for debt settlement companies are ubiquitous, and nearly always use the same pitch: Consumers have the "right" to have their debts reduced by 50, 60 even 70 percent, the ads say, promising information that "credit card companies don't want you to know."

But as Altamirano discovered too late, there also are things the debt settlement companies don't want you to know.

For help understanding how these firms work, msnbc.com interviewed Ray Hardy, who said he recently quit working for a debt settlement company after becoming frustrated with its business tactics. He did not wish to identify the company, but provided intimate details about the industry's tactics during several conversations with msnbc.com.

The dark side

The basic strategy these firms employ is to instruct consumers to stop paying creditors. Instead, they are told to save money in a separate account.  After receiving nothing for many months, the settlement companies say, lenders will be happy to take a lump sum payment for far less than the total debt.  Sometimes, it works. 

The problem for consumers is that high up-front fees -- and additional monthly fees -- often mean they have very little to offer creditors after six months or a year in the program.

"The program takes time, we have to get the credit card companies to think they will never see a dime, then approach them with the 50 percent offer," Hardy said. "The dark side of debt settlement is that most clients could not pay their monthly credit card bills and now we are asking them to send money to our company on a monthly basis.  Most of the money paid during the first year goes toward the fees and most clients who agree to debt settlement give up after less than a year.  So the company will collect some monthly amount from them for one to 12 months, offer no service whatsoever and not a penny paid goes toward getting them out of debt."

That's precisely what Altamirano said happened to her.  She agreed to pay more than $200 as month to Debt Remedy Solutions in early 2008. She says she was told that in 120 days, the firm would begin settling debts with her creditors. She was also told that collection calls and threatening letters would stop.

But as months rolled by, and she continued making payments, the threatening calls didn't stop. In fact, they increased.  Then, phone calls and letters to Debt Remedy went unanswered.  After 300 days, and $1,850 in payments, she stopped paying the firm.

"Nothing had happened," she said. "And now things were much worse."  Her debt had spiraled upward to nearly $25,000. After numerous complaints to the company, she was offered a refund -- of $100.

Altamirano has filed complaints with the California state attorney general's office and state banking regulators, but so far, she has gotten no relief.

"They did not do anything for me and stole $1,857 from my checking account," she said. "It's tricks everywhere.  The problem is there are so many people in this situation. They are having a feast with us."

Debt Remedy Solutions disputes Altamirano's account. 

"We made every effort to work with this customer," spokeswoman Erika Papp said in an e-mail. She declined to answer specific questions about Altamirano's account, but said that her story was investigated by the Better Business Bureau and Florida state officials, who rejected "rejected this customer's complaint as unfounded and without merit."

But a spokeswoman for the Florida Department of Agriculture and Consumer Services, which sent a letter dated June 11 to Debt Remedy Solutions that Papp provided to msnbc.com, disputed her characterization of the agency's finding

 "We have not sided with either party," said Sophie Campfield, a program administrator at the agency. "We have merely acknowledged  that the company responded to the complaint. It does not mean we agreed with what they said."

Papp also said Debt Remedy Solutions was complying with the New York attorney general's subpoena, "and we are working hard with his office to explain the work we do and assist his efforts in trying to understand our industry."

Big fees, small benefits

Hardy, the former debt settlement worker, said debt settlement companies rack up charges against consumers in numerous ways. For example, he said, while the money saved for eventual debt repayment is held in an outside bank account, there are often fees associated with that.  After all the fees are added up, there's often very little benefit to the consumer -- even if the credit card company agrees to a 50-cents-on-the-dollar offer, he explained. A consumer with $10,000 in debt would eventually pay nearly $4,200 in fees by the time commissions, up-front charges and bank account charges are added in.  After paying $5,000 to the creditor, the consumer's savings amount to only about $800, he said.

 "The concept is nuts"

Consumers Union recently advised debtors not to use settlement companies. In 2005, the Center for Responsible Lending said that such services are only appropriate for a very thin slice of consumers -- those who cannot pay their bills but can pay something toward their debts each month.  The vast majority of those consumers could work out their own arrangements with lenders, it said.

"Basically you are saving your money instead of paying your bills, and paying someone to do that. The concept is nuts," said Gail Hillebrand, legislative director for Consumers Union. "Those who can't pay their bills should be in bankruptcy."

 Settlement companies have no legitimate product, but are thriving because so many consumers are deeply in debt, she said.

"They are selling hope. They are selling optimism," Hillebrand said. "Scams always come back in a recession, and now they are just roaring back."

The debt settlement industry has attracted the attention of regulators and legislators around the country. In addition to Cuomo's investigation, numerous other state attorneys general have taken action against individual firms. And several states have pending legislation that would limit fee structures or force licensing on agents.

Industry defends practice, blames "bad players"

Andrew Housser, who runs the Freedom Financial Network debt settlement company and sits on the board of The Association of Settlement Companies, said that settlement firms offer an important service to customers in certain circumstances. But he said an influx of new settlement firms -- many of them run by former mortgage industry workers -- are giving the industry a bad name.

"Hundreds of companies are flooding into this and frankly some of them don't know what they are doing," he said. "There's been explosive growth and unfortunately you get some good players and some bad players."

TASC is actively supporting regulation in 24 states, he said, in an attempt to reign in abusive companies. It's also self-policing its 200 members and investigating complaints against other settlement firms lodged via the association's Web site, TASCsite.org, he said.

"It's frustrating when we hear ads that say 'guaranteed 30 percent (debt reduction) in 12 months," he said. Still, he argued that complaints against settlement firms represent an "extraordinary small minority" of customers.

Housser defended the industry's business model, and disputed claims by consumers and consumer organizations that legitimate settlement firms tell customers to stop paying their bills. By the time consumers arrive at settlement companies, they've already stopped paying bills and often can't afford even minimum payments, he said.

Sending small sums to credit card firms or other creditors won't do any good, he said. "It will just be a never-ending game," he said. Those debtors are better off receiving help negotiating settlements with creditors, he said.

He also said that credit counseling isn't a viable alternative for many indebted consumers.

For example, consumers who enroll in credit counseling generally still face highly monthly payments, because counselors can only negotiate lower interest rates and friendlier loan terms – not principal reductions.  Many debtors can't afford those payments.

"Some (consumers) fit in sweet spot of debt settlement, where they can't afford credit counseling programs but still have some income," he said. "We give them a program to work out their debt for less than face value." Typical monthly payments for debt settlement are 1 to 1.5 percent of total debt, vs. 2 to 3 percent for debt counseling, he said.

Total settlement fees typically average about 15 percent of debt, he said -- meaning a consumer with $10,000 in debt would pay $1,500 to a debt settlement company for help. Housser justified the fees, saying that debt negotiation is a very "labor intensive" business. Legitimate companies clearly list their fees up front, and don't pile on extraneous charges, he said.

Ray, however, said his experience with debt settlement left him with great cynicism for the industry.

"Debt settlement as an idea is good, but the companies are so greedy they charge high fees, most of which are upfront," He said.  "I got into debt settlement because I thought it was saving people from the evil credit card companies, but it turns out the debt settlement companies are profiting mostly from the people that never complete the program.  I walked away after just six months. I had too many questions, and the companies that do debt settlement prefer salespeople who are ignorant and just sell without asking."

Altimirano said her experience with debt settlement left her even more desperate than when she started.

"I don't think I have any future until I get rid of this debt," she said.  "I cannot sleep. I cannot get peace. I'm always in a bad mood. It's horrible. I don't how I still smile."

RED TAPE WRESTLING TIPS

Consumers with debt troubles have several options, though none of them are easy.

Debt consolidation: Using a single loan – such as a home equity loan -- to pay off multiple debts at full price. The benefit is usually lower interest rates, though debt consolidation loans are now much harder to get. This option is generally credit score neutral.

Credit Counseling: Involves paying a small fee – usually under $100 – to a service that offers budgeting advice and will negotiate lower fees and interest rates with debtors. Debtors pay the counseling service, which in turn pays the lenders. These nonprofits sometimes receive financial support from credit card companies. Still, C onsumers Union says credit counseling is often the best choice for consumers who are struggling with high interest rates but capable of paying back their debt.  Debt counseling will impact a consumer's credit scores, but not as severely as other options. To find a debt counselor, visit the National Foundation for Credit Counseling.

Debt settlement: Specialized firms that instruct consumers to stop paying bills with the hope of negotiating discounts at a later date. This has a dramatic negative impact on your credit score.

Bankruptcy: A federal judge will consider your debts and assets, and decide which debts get paid and which get erased. While bankruptcy is the only option for some consumers, it has the longest negative impact on credit scores.

In general, those in debt should never sign up for a service that requires a large up-front fee.

TIPS FOR DEALING WITH DEBT SETTLEMENT COMPANIES

Some advice from N.Y. Attorney General Andrew Cuomo's office:

• Be wary of debt settlement companies that falsely promise to obtain substantial lump sum debt reduction settlements. Many advertise "reduce debt now," and claim to be able to erase as much as 75 percent of credit card debt, but they rarely obtain advertised reductions.
• Never sign a contract with a debt settlement company that requires payment prior to obtaining the promised debt reduction.
• Enrollment in debt settlement plans may not stop creditors from bringing collection lawsuits or prevent enrolled accounts from growing larger through the addition of late fees, interest and penalties. Also, credit reports will be adversely affected.
• Creditors are under no legal obligation to accept a settlement offer for less than the outstanding balance.
• Only a small number of consumers who enroll in debt settlement plans have the financial means to complete them. Usually, they drop out after having paid service fees to the companies without reaching settlements.
• Enrollment in a debt settlement plan premised on stopping payments to creditors will likely lead to more frequent and aggressive creditor collection efforts, often resulting in judgments, wage garnishments and freezing of bank accounts.
• Check with the Better Business Bureau to obtain a Reliability Report on a particular debt settlement company and its rating.
• A wise first step to help resolve an outstanding account is to speak directly to the credit card issuer. Alternatively, it may be helpful to speak to an attorney or an accredited credit counselor who can help develop a plan of action that best works for each consumer's unique situation.

 

 

 

 

 

 

 

 

 

 

 

 

 

Drowning in debt, like so many young college graduates in America, Sarah Fightmaster struggles to keep her chin up while credit cards and student loans drag her down. It all started, she says, when she applied for her first credit card as a 19-year-old college student so she could get a free DVD player. In this video, Fightmaster tells her own story.

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Fightmaster, now a lawyer in Brooklyn, describes in this video how a family tragedy -- the death of a grandmother -- helped keep her afloat, thanks to an inheritance. Still, she struggles just to make her minimum payments on credit cards and loans.

With NBC producers Blayne Alexander, Hilary Guy, Sabina Mohan and editor Ed Eaves.

When President Barack Obama signs credit card reform legislation -- which should happen any day now -- that will be a great day for consumers.  The legislation represents the first significant upgrade to American consumer rights in a long time.  The bill has some real teeth -- it's much stronger than the original bill that's been floating around the House of Representatives for more than a year. Clearly, the president threw all his political power behind the effort to rein in abusive credit card practices, delivering speech after speech imploring changes and even calling issuers to the White House for a stern reality check.

Too bad the president is backing the wrong horse. 

While $39 over-limit fees are hideously unfair and deserving of legislative attention, the number that really needs attention is 649,917 -- the number of U.S. homes that entered foreclosure last quarter.

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Credit card debt is not the most serious problem facing America today. Empty houses are. Sneaky late fees and arbitrary interest rate hikes are terrible -- but foreclosures and homeowners who are severely under water carry exponentially higher consequences.  For now, however, the Obama administration has decided to take the road more traveled. It has taken up the populist cause of credit card reform while abandoning dramatic mortgage market reform that Obama promised in October and again in February. 

I cheer the credit card bill, and frequent readers of this column know I have been urging those changes for many years.  I don't lightly surrender credit card issues as a top priority.  But last week, Obama quietly watched as efforts to give struggling homeowners help in bankruptcy court  died a legislative death. That was a mistake.

How did it happen? Ask Illinois Sen. Dick Durbin, the Democrat who first introduced Obama to the United States at the 2004 Democratic convention.

"And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place," he told a  Chicago radio station recently.

Durbin is the Senate's bankruptcy reform champion. His proposal to allow mortgage rewriting by  bankruptcy judges was voted down 51-45 in the Senate, with 12 Democrats joining all Republicans in stopping the effort.  While those 12 senators -- including Arlen Specter of Pennsylvania, Max Baucus of Montana and Tim Johnson of South Dakota-- were the direct reason the legislation died, Obama offered no help. In stark contrast to his aggressive public stance on credit card reform, Obama was silent on mortgage/bankruptcy reform.

'A side show compared to the mortgage issue'
Adam Levitan, a Georgetown professor and bankruptcy expert, was disappointed that the administration chose to champion bank credit card reform over bankruptcy reform.

"Obama put his personal prestige on the line for the credit card issue ... and the shame of it is, while I support the credit card legislation, it's just not that important," he said. "It's a side show compared to the mortgage issue. But politically it's an easier sell."

Why is bankruptcy reform so important? Currently, consumers who declare Chapter 13 bankruptcy -- the kind where debtors repay their loans but get extra time and some debt relief -- find themselves before a federal judge who gathers all the debt-holders into a room and forges a compromise payment plan. Credit card firms, personal loan holders -- everybody takes a hit, based on what the debtor can realistically pay.

But currently, primary mortgages are exempt from the process. There's no way to reduce a mortgage loan in bankruptcy.  Mind you, mortgages on second homes can be reduced. So can loans for cars, boats investment properties, etc. Primary mortgages stand alone, outside bankruptcy courts.

Naturally, the banking industry likes things this way and has been fighting to keep primary mortgages out of bankruptcy proceedings.

The issue has rankled consumer advocates for decades, but it took front and center as the number of U.S. foreclosures skyrocketed in 2008.  Bankruptcy mortgage reductions – known by the pejorative term "cram downs" by the banking industry -- could help 1.7 million consumers avoid foreclosure, according to the Center for Responsible Lending. The mere possibility of a cram down also provides motivation for banks to work with consumers on voluntary modifications, because the bank might lose more in a bankruptcy filing.

In October, when Wall Street banks went looking for a $700 billion bailout from the U.S. Treasury, consumer advocates tried to seize the moment and exact bankruptcy reform in exchange for bailout money.  At the time Obama said the bailout bill was so urgent that it shouldn't be bogged down with the potentially contentious bankruptcy provision. He repeatedly said he supported the change, however, and that it would come. He repeated that promise in February, after taking office, when the administration sketched out its housing rescue plans.

But when bankruptcy reform died in the Senate, Obama was silent.

Levitan, the Georgetown professor, said Obama's failure to go to bat for bankruptcy cause could doom the administration's other efforts to help troubled homeowners. So far, the administration has decided to rely on voluntarily mortgage modifications from banks, augmented by incentives from the government in the form of direct payments to banks that complete modifications.  (See my colleague John Schoen's overview of the plan.)

"It's quite bad for consumers," Levitan said."The Obama plan was designed as a combination of carrot and stick. We are now left with only carrot and no stick. In some ways, it's the worst of all worlds."

Most consumer agencies, excited to have someone from "their team" in the White House, aren't making much noise about the bankruptcy issue. After years of feeling ignored, they are thrilled to get movement on the credit card issue. In fact, one consumer advocate I spoke to said she believed that Obama's abandonment of the bankruptcy reform was part of a strategy -- banks couldn't swallow both credit card and mortgage changes at the same time, she speculated, so he went with the easiest step first and plans to take on the harder issue later.  I hope she's right.

Levitan thinks changes in bankruptcy law might still be in the cards, but he interprets the events of the past few weeks differently.  The current administration, he says, is hoping to "muddle through" the housing crisis without making substantial changes to the mortgage market. 

"If an acute crisis can be avoided, they'll settle for that," he said. "The Obama plan was never super aggressive. It was always a mitigation plan not a solution."

Good, but tepid, market reforms
Additional housing market reforms that are being discussed in three separate congressional bills involve important, but minor technical changes to the market.  A House bill would prevent mortgage originators from selling off all their loans to investors, which would force them to keep "skin in the game," and provide an incentive to more carefully screen applicants. Lenders would have to keep at least 5 percent of their loans on the books, according to the bill's provisions. Part of the mortgage meltdown was blamed on originators dumping all their loans on under-informed investors, giving originators no incentive to avoid making bad loans.

This "skin in the game" provision won't work, however, if lenders are allowed to insure themselves against losses in these loans.

The same bill, the Mortgage Reform and Anti-Predatory Lending Act, would ban many kinds of early-payment penalties and prohibit lenders from steering consumers into higher-cost loans when they could qualify for cheaper loans.  The penalty provisions are weak though: Lenders would have 90 days to act after receiving consumer complaints, allowing banks to have what is sometimes called a "first bite at the apple."  The most profitable strategy for a bank would be to mistreat all customers, then modify loans for the few consumers who noticed and complained.

Kathleen Day, spokeswoman for the Center for Responsible Lending, says the legislation isn't perfect, but it's a good start.

"We wish it were stronger, but it's much better than the (legislation proposed last fall)," she said.  "At its core, this legislation provides that mortgage lenders may only make mortgages that a consumer can afford to repay."

The legislation, which is still working its way through Congress along with two other similar bills, will help many future homebuyers.  So will a new HUD-1 form, the key document consumers sign at mortgage closings, which take effect in place Jan. 1 The new form more clearly explains fees and other costs to purchasers.

But at its their core, these mortgage reform efforts aren't designed to help struggling borrowers much. They are left with the carrot-but-no-stick plan mortgage rescue plan.  So far little has been done to slow the national foreclosure rate, which doubled in the first quarter of this year, compared to last year. And it does nothing to help the one in five homeowners who live in a building that's not worth their mortgage. 

Perhaps Obama and his economic advisers have changed their mind on bankruptcy modification since his promises in October and February. There is a legitimate debate to be had about the bankruptcy option. Banks argue that allowing mortgage loans into bankruptcy would raise the cost of all mortgages and dramatically change the nature of contracts between consumers and banks.  Perhaps the administration now sees this issue the banks' way. If so, Obama's supporters, and consumers sitting in under-water homes, deserve an explanation.  Perhaps during all the predictable celebration and back-slapping about credit card reform, Obama could take a moment to address the empty home problem.

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Everybody makes mistakes. But not every mistake is forgiven. In our capitalist society, mistakes with money are carefully logged, categorized and entered into a formula that controls your financial future -- your credit score.

But what happens when the companies that keep this list make mistakes? After all, the credit bureaus -- which keep the list of who's been naughty and who's been nice -- are staffed by people who are just as fallible as the rest of us. Theirs is a complicated business. They keep track of billions of pieces of information. Mistakes do happen.

Unfortunately, complaining about mistakes on your credit report can be one of the most maddening experiences a consumer can have. Erasing an unfair black mark on your credit history after a bout with identity theft or a run-in with a malicious company can turn into an odyssey worthy of a Kafka novel. That's why the first installment of our "How to Complain About" series takes on this most vexing of consumer issues.

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The credit report is composed of voluntary submissions by companies that you do business with. Those companies are called "furnishers." A credit card company is a furnisher. So is a furniture store where you bought a living room set from on credit; so is a car dealership. As you might imagine, your credit report is only as accurate as the furnishers who contribute information about you. Their quality control measures vary widely.

There are many reasons a mistake might find its way onto your credit report. Perhaps a furnisher forgot to give you credit when you paid your final bill. Perhaps someone impersonated you, and didn't pay their bills. Perhaps a furnisher made a data entry error when submitting updates, and accidentally blamed you for someone else's unpaid bill. Or perhaps you and a creditor have a real difference of opinion about a debt it says you owe.

In most arenas of life, if someone makes false statements about you that cost you money or reputation, you can sue for libel. That's not true in the credit reporting system, however. Decades ago, Congress granted furnishers general immunity from libel lawsuits. That gives them less incentive to be impeccably accurate when they send data to the credit bureaus.

Credit report mistakes range from inconsequential misspellings to wrongful reports of debt defaults that prevent the victim from ever borrowing money. Credit reports are notoriously inaccurate, though it's hard to say with precision how many reports have errors, as the credit bureaus keep that secret. But studies by third parties have found error rates as high as 25 percent. A small pilot study conducted by the Federal Trade Commission recently showed that 16 percent of consumer reports contained errors that would impact a consumer's credit score. The credit bureaus, which compile and sell the credit reports, told Congress in 2004 that the error frequency is much smaller -- only 3 percent -- but that would still impact nearly 6 million Americans.

So it's entirely possible you'll find yourself battling a credit bureau about a mistake at some point in your adult life.

Dispute process is born
Decades ago, it was almost impossible to see the contents of your credit report and to fix mistakes. In response to an avalanche of complaints, Congress set up a formal dispute process when it passed an update to Fair Credit Reporting Act in 1997. In that law , Congress mandated that consumers be given a fair trial when they believe something inaccurate is being reported. It requires the nation's credit bureaus -- Equifax, Experian, Trans Union and the smaller regional bureaus -- to take evidence from consumers, evidence from furnishers and decide who is right.

Unfortunately, this process has been turned into something of a kangaroo court. In a recent report called "Automated Injustice," the National Consumer Law Center described the disheartening procedures that are now in place.

Consumers who initiate disputes often send in pages of documentation supporting their claims. But in many cases, the paperwork is sent overseas to places like Mumbai, India, for cursory processing, the law center reported. There, employees work under tight quota and bonus systems. Subcontractors for Equifax, for example, must resolve more than 13 disputes every hour, or about one every four minutes, according to the report.

So, according to the report, the paperwork is almost always ignored and the complaint boiled down to a two-or three digit code. About one-third of the time, that code indicates simply that the consumers claims the credit blemish is "not his/hers." This code is then sent to furnisher, which is asked simply to affirm the original entry. If it does, the bureau will often decide that the case is closed.

The National Consumer Law Center doesn't mince words when describing this procedure.

"The FCRA dispute process has become a travesty of justice," it said in the report.

How can you get around this travesty? It's not easy. But as is typical of most consumer protection disputes, there are two keys: persistence and the threat of a lawsuit. If your dispute process hits a serious snag along the way, you'll probably have to consider filing a lawsuit. But to win, you have to prove more than a simple mistake occurred. You'll have to prove the bureau, or the furnisher, were negligent. The mere threat of a lawsuit might gain you satisfaction, but you'll have an empty threat if you don't have good records showing the bureau and furnisher ignored your repeated requests for justice.

Maintaining your rights to sue, and building a good case along the way just in case, are critical to a successful dispute with the credit bureaus, says attorney Chi Chi Wu, who authored the "Automated Injustice" report. Much of the advice she gives has a dual purpose: to win the dispute, but also to preserve legal rights and create a lawsuit-ready paper trail, just in case. Here are some of the steps she recommends.

1. Request a review in writing
All three credit bureaus allow you to dispute errors using online forms.

• EXPERIAN http://www.experian.com/disputes/
• EQUIFAX http://www.equifax.com/online-credit-dispute/
• TRANS UNION http://annualcreditreport.transunion.com/entry/disputeonline

Wu says using them is a big mistake. The forms only help the bureaus steer your issue into one of their dispute "buckets," helping the agency automate your claim. It also means you'll have less of a paper trail to demonstrate negligence later on. Wu strongly recommends that consumers use old fashioned U.S. mail to file their complaints and send the letter return-receipt requested. And naturally, keep good records of all contact with a credit bureau. At this point, buying a shiny new notebook for just this purpose is a good idea.

• EQUIFAX mailing address
• TRANS UNION mailing address
• EXPERIAN No link. Address will be on credit report.

And while all three companies provide a simple form to fill out with dispute information, Wu recommends adding narrative detail and supporting documents anyway – again, to prevent the bureaus from "bucketing" you. That will help a lawyer make a case later than the bureau didn't perform even the most basic investigation.

It's always good to send the dispute to all three bureaus. While the reports can differ, the reports generally overlap and a black mark on one report usually becomes a black mark on all three. So while there may only be one bill in dispute, you probably have three disputes on your hands.

2. Also notify the furnisher
It seems reasonable that the credit bureau would send a copy of your dispute to the company that's involved, but don't count on. Send a separate, return-receipt-requested letter to the company that claims you didn't pay your bill. A carbon copy version of your dispute letter to the credit bureau should be sufficient.

3. Be ready for surprising account numbers
When tracking a credit bureau entry, it's likely that your "bad debt" will have an unfamiliar account number next to it. Companies often assign new numbers to accounts that go into default. Also, when debts are sold to debt collectors, they usually give an account its own number. For example, a dispute involving a furniture store account No. 345234 might end up listed on your credit report as Joey's Collections No. 432432. When filing dispute letters, including all possible account numbers. That cuts down on possible confusion -- or legal squirming -- later on. For example, a consumer might send a letter saying, "Please delete account No. 345234, and the bureau might "agree" to the request while doing nothing, and leaving the unpaid bill under the other account number.

4. Tell them where to go
This step might sound presumptive, but Wu suggests that the consumer explicitly recommend the steps that the credit bureau should take to investigate the matter. For example, if you've spoken to an operator at a furnisher who admits an error, tell the credit bureau to call that furnisher and interview that operator. The bureau may not do this, but this inclusion could help a lawyer at a later date persuade a judge that the bureau didn't take even the most obvious steps to resolve the dispute.

5. Discredit the furnisher
A little legal legwork can help make your case, too. If there is evidence that the furnisher involved in your dispute has a reputation for complaints of inaccuracy, include that evidence in your letter. This will help build the case that the bureau should not have presumed the furnisher was accurate.

Other advice
It might seem natural to complain directly to the furnisher of the information rather than the credit bureaus. However, the original Fair Credit Reporting Act granted no legal rights for to consumers to do so, and steered all complaints to the credit bureau dispute process. That limitation is changing. The Fair and Accurate Transaction Act of 2003 includes provisions calling for "direct disputes" with furnishers, though the Federal Trade Commission has yet to issue formal guidelines for the process. They should appear soon; public commentary on proposed rules was entertained by the agency last year.

In the meantime, consumers can try a direct dispute, but should only do so after completing the dispute process with the credit bureaus and getting an answer. Skipping the bureau process would force a consumer to surrender their rights to sue the furnisher, Wu says.

Even before the final rules are determined, Congress spelled out a few specifics in its 2003 law. Send a letter to the furnisher demanding a "reinvestigation" of the debt. Ask for all paperwork documenting the debt. Like the credit bureaus, the furnishers will be required to supply a response within 45 days. If none is forthcoming, the debt must be removed from the credit file. Even if a response arrives, it's entirely possible the company will not be able to produce detailed records documenting the debt, which would also enable a request for removal of information.

In advance of the FTC rules, consumers may not have the right to sue companies for non-compliance. But the process can work anyway, and stronger consumer rights should arrive soon.

Finally, if either the bureau or the furnisher isn't playing ball, a lawsuit is the consumer's last resort. Credit report dispute cases are highly specialized, and it's generally best to use a lawyer who specializes in these cases, Wu said. A list can be found at the National Association of Consumer Advocates Web site, www.naca.net.

There aren't nearly as many FCRA experts as there are credit report disputes, however, so some consumers may be frustrated by their inability to interest a lawyer in their case. That's why the previous five steps are so important. Lawyers love plaintiffs who are well-prepared with the right documentation and arrive with what amounts to an open-and-shut case. It's not necessarily fair, but it's true: Consumers who think like a lawyer from step one are much more likely to get justice, and a clean credit report, in the end.

If you want a head start on a dispute letter, you can see an example here.

There's been a lot of talk lately about loan modifications for homeowners facing foreclosure, a discussion that reached a crescendo on Wednesday when the White House announced details of its "Making Home Affordable" plans.

A woman I'll call Mags (we're preserving her anonymity) had heard the talk too. The suburban Virginia woman in her 60s is homebound, recovering from ankle surgery. Her husband has recently declared bankruptcy. Three months ago, she started contacting her lender to ask for help. She ran into a wall of busy signals and vague answers. So when she heard about a private company that said it could help work with her bank to modify her loan and save her home, she began to investigate. That's how she landed in my inbox.

"How can we tell that this company is legitimate, will do what they say they will?" she asked. "We desperately want to modify our mortgage, but we don't want to be stupid!"

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There was a red flag right away. Mags said the company wanted a $3,000 up-front payment.

I e-mailed Mags that day to ask her what this firm would do that she couldn't do for herself. She didn't write back. A few days later, I called. That morning, she'd sent the company a check for $2,881. And she was very sure she'd done the right thing. She'd checked the company out at the Better Business Bureau and there were no complaints. The employees sounded very competent, she said, and the company was advertising on television. I asked her if she'd seen advice on various Web sites telling consumers not to pay up-front fees for loan modifications. She said she had, and she'd asked the company about this.

"They said, 'Has anything else you've done so far worked?"

I talked to Mags about how to get free loan modification help, through the list of approved housing counselors on the U.S. Department of Housing and Urban Development's Web site. I sent her a link to HUD's "find a counselor" Web page. She said she'd already been to the site, but didn't find what she was looking for there.

"There are so many different agencies listed, how do you choose?" she asked, noting that about three dozen are listed in Virginia. "Are they all free? How can you tell?"

In the end she said she relied on the personal recommendation of a co-worker who had also signed up with the for-profit company.

Within minutes, Mags politely thanked me, rushed me off the phone and then didn't respond to my additional e-mails. I had the sick feeling she wouldn't get anything for her $2,881, but for some reason the modification company was more persuasive than I was. She was willing to pay for something that should be free.

No answer
So I went back to the HUD site and looked up the counselor that was geographically closest to Mags. When I called, the phone went unanswered. There wasn't even an answering machine to leave a message, and an e-mail got no response.

Government efforts so far to help out troubled homeowners have been equally ineffectual. The Hope for Homeowners alliance program announced last year with great fanfare has so far only helped a few hundred mortgage holders.

It's no wonder Mags would turn to a company that promised immediate assistance. In fact, swarms of for-profit companies are advertising loan modification help right now. They are succeeding because consumers still don't really know where to turn, said Seattle-based mortgage fraud expert Richard Hagar.

"They are filling in where our government is failing," he said. "The government says go get a housing counselor, but when you make a call there is not always somebody there."

Many consumers have hit similar brick walls when dealing with lenders, Hagar said, creating an ideal opportunity for loan modification con artists.

At the unveiling of the White House loan modification program on Wednesday, officials reiterated that consumers don't have to pay for mortgage help. Still, the pitches by for-profit firms can be very powerful, Hagar said.

"They say they have special phone numbers and can get you help right away," he said.

The problem for people like Mags is that criminals and government-backed counselors can look identical to consumers who need help. The organizations listed on HUDs Web site – with names like Consumer Credit Counseling Services – seem indistinguishable from for-profit firms at first glance.

"Whether it's a scam or it's legitimate, it all starts off the same way," he said.

Mortgage brokers piling in
To some struggling homeowners, the salesman behind the mortgage modification sales pitch might sound familiar, says Curtis Novy, a California-based mortgage broker who is also an expert on mortgage fraud. He said many of his former colleagues are trying to make a quick buck in the loan modification market.

"A lot of former subprime loan officers have discovered all this is a money maker," he said. "They made money selling mortgages people couldn't afford and are now making money modifying those mortgages."

One online advertisement targeting real estate professionals recently viewed by msnbc.com promises mortgage brokers a healthy new revenue stream if they attend a class and learn loan modification skills.

"It just makes sense that you learn how to do loan modifications. A certain percent of the sellers you are coming across will qualify for a loan modification and you should be the one providing this service (and earning a fee for doing it)," it said.

Tanisha Warner, a spokeswoman for the Consumer Counseling Credit Services, she said she hears about consumers paying for modification help all the time.

"When people find their backs are against the wall, they are willing to believe that someone is going to help them," she said, while stressing that her firm's mortgage assistance services are free.

Not all for-pay loan help services are scams, though, so it's hard to give blanket advice, Hagar said. Many consumers find it necessary to pay a lawyer to work out a complicated loan restructuring, for example, and there's nothing wrong with paying a lawyer an up-front fee. Hagar said he's also seen some legitimate services that charge a small up-front fee, and ask for larger payment upon the completion of a successful modification. As a rough guideline, he said, consumers should not pay more than a few hundred dollars up front, unless they are dealing with a lawyer.

Some government regulators have begun to take notice of potentially misleading modification services. In February, Connecticut Attorney General Richard Blumenthal announced his office was investigating a company named H.O.P.E. Alliance after it allegedly asked for $1,500 in up-front payments from consumers. In order to afford the fee payment, the firm told customers to stop paying their mortgage, he said. The firm's name also deceptively mimics the name of the government-backed, nonprofit modification effort, Blumenthal alleges.

On the Web site announcing the new White House loan aid plan – FinancialStability.Gov – federal officials also make clear that up-front payments are not necessary to get help.

"Beware of any person or organization that asks you to pay a fee in exchange for housing counseling services or modification of a delinquent loan. Do not pay – walk away!" it reads.

Still, that message hasn't gotten through to consumers like Mags. And when HUD's Web site lists phone numbers that go unanswered and banks give consumers the runaround, it's no wonder troubled homeowners are tempted to pay when they finally find someone who will answer the phone.

As federal officials continue to create programs to help troubled homeowners, they should be sure their marketing plans are at least as extensive as those designed by con artists. HUDs counselors should be the first link that lands in a Google search, for example. Public service announcements from the president telling consumers where to get free help wouldn't hurt either.

RED TAPE WRESTLING TIPS
There is no reason to pay for mortgage help. When trying to get a HUD-approved counselor, persistence will pay off. Visit the HUD Web site and try several phone numbers until you reach someone who sounds genuinely interested in helping. Msnbc.com reached a counselor on our second try.

Beginning this week, you can test your eligibility for a government-backed loan modification at the Financial Stability Web site.

If you are tempted to pay someone, don't do so until you get results. You wouldn't pay for auto repairs or a home remodel until the work is done, so why pay a mortgage modification company? As a rough guideline, Hagar said, consumers should not pay more than a few hundred dollars up front unless they are dealing with a lawyer.

People facing mortgage problems often are embarrassed and try to deal with them privately. If anyone in your family might be in trouble, don't be shy. Recommend they visit the HUD Web site – take them to a computer and show them the site if need be. HUD counselors can offer a variety of solutions to consumers. Warner said a surprising number of consumers are able to refinance and avoid foreclosure, thanks to new government-backed programs.

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