Rising personal debt and bankruptcy filings grab headlines. Add to that access to easy credit and some really tempting spring shoe sales, and it's not a stretch to imagine 9 million Americans turning to the open arms of credit counseling firms.

Need a credit counselor? There are plenty to choose from. Ten years ago, there were just 200 debt management firms. Today, there are more than 1,000. What's your pleasure? Face-to-face service? Phone-based meetings? Online one-on-one advice? Have it your way -- help is delivered almost any way you want it.

But when you sign on for professional debt counseling services, is it help that you're really getting?

Heated competition and deadbeat lenders
Heartache, high fees, and the runaround seem to be the services du jour. So claims a recent report -- the first-ever study of credit counseling -- by two consumer groups, the Consumer Federation of America and the National Consumer Law Center.

The report, titled "Credit Counseling in Crisis," found that a new generation of credit counseling firms is bringing the industry down. "Aggressive firms masquerading as 'non-profit organizations' are gouging consumers. Deceptive practices and outright scams are on the rise," says Deanne Loonin, staff attorney for the NCLC. "More consumers are getting bad advice and access to fewer real counseling options."

While competition for your hard-earned debt is heating up, funds for counseling agencies are drying up. According to the report, credit card companies and retailers such as Citigroup's (NYSE:C) Citibank, J.P. Morgan Chase's (NYSE:JPM) Chase Manhattan, Capital One Financial (NYSE:COF), and Discover have cut back funding to credit counseling agencies. In years past, these firms essentially footed credit agencies' bills, giving an average of 15% of the recovered debt back to the counseling firms. (Fools, please take a moment to note the opportunity for glaring conflicts of interest.) Last year, they kicked back just 8%. Some, according to the report, now donate nothing. That's right, a whopping zero. Nada.

Not only that, but lenders have become less willing to lower interest rates for consumers enrolled in debt management programs. That used to be the main selling point for counseling firms. If someone is unable to negotiate a lower interest rate on their own, the service has the muscle and might of a large client base to negotiate a better deal on a debtor's behalf.

At least they used to.

Four of 13 major credit card issuers (Bank One/First USA (NYSE:ONE), Discover, Chase Manhattan, and Wells Fargo (NYSE:WFC)) have increased the interest rate they offer to consumers seeking professional help. If you carry cards from Bank of America (NYSE:BAC), Chase Manhattan, or Providian (NYSE:PVN), you'll have better luck. If your balance is with Sears, Roebuck & Co. (NYSE:S), don't even bother. (For a full list of lenders' negotiation track records, download the full Credit Counseling in Crisis report.)

Without that negotiating power, fewer consumers are sticking with debt counseling, almost half turning to the next-best alternative -- bankruptcy. A record 1.5 million people filed last year.

With lenders tightening their purse strings, credit counseling firms are counting on a new revenue stream -- you. Fee-driven counseling agencies have started popping up all over the place. Perhaps you've noticed a few late-night commercials for debt consolidation?

The rising price of debt reduction
If you got the impression that many of the firms charge nominal fees, or whatever a client can afford, you're paying attention. That's exactly the notion many of these ads are trying to convey.

Of course, once they get you in the door (or on the phone), you may discover a very different fee structure. Such deceptive marketing practices are not uncommon. The Credit Counseling Crisis report showed that nearly 20% of the debt counselors surveyed initially advertised or told consumers via phone that their services were free, when in fact they weren't. The report also noted that the fees are often deceptively referred to as "voluntary donations." Clients can be charged a "voluntary donation" as much as a full month's consolidated payment, just to establish an account.

You'd think that higher fees would buy you better service. Not so. The report said that many of the newcomer agencies forego financial and budget counseling and community education, and simply funnel consumers into debt consolidation/debt management programs.

Complaints to the Better Business Bureau about credit counseling agencies nationwide increased to 1,480, up from 261 in 1998. The top complaints against firms include deceptive and misleading fee disclosure, failure to deliver on-time payments to creditors, and doling out improper advice.

Conduct unbecoming of a non-profit
In the meantime, the industry is taking a hard look at itself. The report recommends that credit counseling trade associations "should set strong, public 'best practice standards' and provide for vigorous, independent enforcement of these standards." It also wants members to more openly disclose their success rates -- mainly the number of consumers who fail to complete their programs.

The report also urges member agencies to diversify their funding. That's a smart move. Becoming less reliant on creditors -- who seem all too happy to cut back their contributions -- will help dissipate the cloud of suspicion many consumers rightly feel against these agencies. Conflicts of interest are quite unbecoming, especially when it comes to debt counseling.

Also unattractive are agencies that act like for-profit entities, when nearly every agency in the industry has non-profit, tax-exempt status. In its survey, the Consumer Federation of America and the NCLC cite profit-making behavior such as aggressive advertising, close ties to for-profit lenders and payment processing centers, and lavish executive salaries. It notes IRS tax reports that reveal absurd executive compensation and apparent windfall revenues. The report goes on to reveal nonprofits reaping millions of dollars in gains, such as Phoenix-based Credit Counselors of America, which reported net gains of $6 million on its 1999 tax return. Cambridge Credit Counseling and Genus Credit Management similarly reported net gains in 2000 of $7.3 million and $5.6 million, respectively.

The Consumer Federation of America and the NCLC recently solicited involvement from the IRS to enforce existing standards for non-profit credit counseling organizations and step up its scrutiny to see if all are legitimate charities deserving of tax-exempt status. In many states, nonprofit firms are exempt from regulations governing the credit counseling business.

The IRS is certainly taking notice. According to a story last week in The Washington Post, the IRS noted the potential for corporate abuse. "It is suspected that some of these organizations are acting in a commercial for-profit manner or as part of a tax shelter promotion," noted an IRS document setting agency priorities for this fiscal year.

At the same time, those struggling with unmanageable debt may not be able to avoid contact with these firms. The government is looking at reform bankruptcy legislation that will drive consumers directly into the arms of credit counseling entities. Before debtors can file for bankruptcy relief, they will be required to go through two rounds of credit counseling by a federally approved agency.

When to turn down "help"
Until "federally approved" equals "federally scrutinized," consumers should heed the following advice offered in "Credit Counseling Crisis":

1. High fees. In general, if the set-up fee for a debt management plan (also known as debt consolidation) is more than $50 and monthly fees are over $25, look for a better deal. Similarly, if the agency is vague or reluctant to talk about specific fees, go elsewhere.

2. "Voluntary" fees that aren't so voluntary. Some agencies publicly claim that their fees are voluntary, but don't pass this information on to consumers. Others will tell you that their fees are voluntary, but will put a lot of pressure on you to pay the full fee, even if you can't afford it. Ask all agencies you contact if their fees are voluntary. If the full fee is too much, do not pay the agency more than you can afford.

3. The hard sell. If the person at the other end of the line is reading from a script and aggressively pushing debt "savings" or the possibility of a future "consolidation" loan, hang up.

4. Employees paid by commission. Employees who receive commissions for placing consumers in debt management plans are more likely to be focusing on their own wallets than yours.

5. They flunk the "20-minute" test. Any agency that offers you a debt management plan in less than 20 minutes hasn't spent enough time looking at your finances. An effective counseling session, whether on the phone or in-person, takes a significant amount of time, generally 30 to 90 minutes.

6. One size fits all. The agency should talk to you about whether a debt management plan is appropriate for you rather than assume that it is. If the agency doesn't offer any educational options, such as classes or budget counseling, consider one that does.

7. Aggressive ads. Many agencies that advertise treat consumers fairly. However, some are being investigated or sued for deceptive practices. Many others charge unreasonable fees or offer no real counseling. Don't just respond to television and Internet advertising or telemarketing calls. Get referrals from friends or family, find out which agencies have been subject to complaints, and talk to a number of agencies before making a decision.

Dayana Yochim would like to thank the debt consolidation firms who call her. At home. Every morning. Even though she carries no revolving debt. They inspired her to write this column. As you can see in her profile, she owns none of the companies mentioned.