AmeriDebt touts itself as "the friend of consumers in crisis," but the Federal Trade Commission alleged the company hid fees and did not educate people about how to get out of debt.
The FTC, which filed the lawsuit in federal court, also claimed the Germantown, Md.-based company falsely described itself as a nonprofit organization.
"We will not allow consumers to be duped into 'contributing' hundreds of dollars to these so-called 'nonprofits,'" Howard Beales, director of the FTC's Bureau of Consumer Protection, said in a statement. "There was nothing voluntary and nothing charitable about these payments. Consumers' money didn't go to creditors, it just ended up lining the pockets of the defendants."
AmeriDebt would not comment on the lawsuit. But on Tuesday it issued a statement saying it expected the FTC to take legal action. AmeriDebt attorney Zynda Sellers said the company looked forward to telling its side of the story.
With personal bankruptcies surging to record levels, there is a deep pool of customers for consumer counseling companies.
Complaints against such companies are increasing, according to Edward Johnson, president and chief executive of the Better Business Bureau-Washington D.C. In 1998, 237 complaints were filed nationwide. Last year, complaints grew to 1,480, with the largest percentage naming AmeriDebt.
Consumer groups hailed the FTC's lawsuit.
"We applaud this action because there are entirely too many aggressive for-profit companies that are masquerading as charitable nonprofit credit counselors," said Travis Plunkett, legislative director at the Consumer Federation of America. "AmeriDebt has become the symbol of bad credit counseling in this country, but they are by no means the only shady operators."
In its complaint, the FTC charged that AmeriDebt does not operate for charitable purposes, but instead works to make money for affiliated for-profit companies. The agency said the company also charges upfront fees to enroll consumers in debt-management plans, even though AmeriDebt advertises no such initial costs.
AmeriDebt says on its Web site that it has worked with 400,000 people and had more than 90,000 current clients as of July.
Missouri and Illinois have filed separate lawsuits against AmeriDebt accusing the company of defrauding customers.