The IRS and the Federal Trade Commission (FTC) have been cracking down on non-profit consumer credit counseling agencies lately. The FTC has prosecuted over a dozen agencies for false advertising and fraudulent practices and settled with one company for $35 million. Credit counseling agencies are required by state laws to operate as non-profits and since the IRS is the agency responsible for granting 501(C)(3) non-profit status, consumer complaints have motivated the IRS to audit over 40 agencies.

As a result of IRS audits, all of the agencies have lost their tax-exempt status. Furthermore, 98 percent of new credit counseling applications for non-profit status have been rejected in the past two years.

Credit Counselors Lose Non-Profit Status

The IRS states that non-profit organizations receive tax-exempt status in return for providing a public service. Credit counseling agencies are supposed to provide counseling and education to consumers who find themselves overwhelmed by debt. The goal is to find the debt relief solution that is in the best interest of the consumer. Instead, the IRS states, counseling and education services have been minimal, while pressure to make “voluntary donations,” or set up debt management plans through the agency have been common. Agencies receive up to two-thirds of their funding from the companies who are owed the money and this raises the question of whose best interest is being served.

History

The National Foundation for Credit Counseling (NFCC) was formed in 1951 with a mission to promote fiscal responsibility and financial literacy among the general public. In 1983, the Association of Independent Consumer Credit Counseling Agencies AICCCA) was founded in order to promote ethical standards for the industry. The two organizations disagreed on counseling methods; NFCC claimed that phone interviews were sufficient, while AICCCA maintained that more comprehensive, face-to-face counseling was necessary. An industry advocacy group, the American Association of Debt Management Organizations was formed in 2003 to promote the operation of credit counseling groups.

Better Business Bureau

The Better Business Bureau has also issued warnings to consumers to beware of agencies that attempt to charge high up-front or monthly enrollment fees for debt management programs. Also watch out for agencies that won’t send information without first collecting your personal financial information or that recommend debt management plans before they have offered budget and management skills counseling.

Legitimate Credit Counselors

While many credit counseling agencies are under scrutiny, there are legitimate companies recommended by the FTC and Better Business Bureau. The FTC online brochure Fiscal Fitness, offers information for choosing a legitimate credit counseling service and the Better Business Bureau offers Tips on Choosing a counseling Agency.

FTC: Knee Deep in Debt