Credit Counseling

Gone off the deep-end charging computer gear? When for better turns into for worse, credit counseling can appear to be the only way out. If you’ve fallen into troubled financial times, you may be tempted to turn to a credit counseling agency. Be warned: all credit counseling agencies are not alike. A recent Internal Revenue Service (IRS) investigation has found that many credit counseling services are not what they appear to be …

It turns out that too many credit counseling services that have billed themselves as non-profit organizations are anything but. The investigation prompted the IRS to revoke (or propose to revoke) the tax-exempt status of a considerable number of agencies.

Credit counseling agencies (”CCAs”) have traditionally been nonprofit companies that rely upon contributions from creditors and charities and small fees from consumers to cover the operating costs of providing advice, debt counseling, and debt management plans to consumers who have trouble paying their credit card bills. Some new entrants to the industry, however, have developed a completely different business model—a “for-profit model” designed so that their non-profit credit counseling agencies generate massive revenues for for-profit affiliates through advertising, marketing, executive salaries, and any number of other activities other than actual credit counseling. The new model looks to the consumer to provide those revenues.

Many of the new non-profit and for-profit companies are organized and operated to generate profits from an otherwise non-profit industry. Evidence of the new entrants’ intention to create profits is indicated in several ways, including: (1) the manner in which the new entrant is organized, (2) the extent of control exercised by a for-profit entity over its non-profit CCA affiliate, and (3) the massive revenues funneled to the for-profit entity from the non-profit agency.

Cite: The U.S. Senate’s Committee on Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations report Profiteering in a Non-Profit Industry: Abusive Practices in Credit Counseling

If you need to turn to a credit counseling agency, choose carefully, my friends …