by | Oct 2, 2011 | Uncategorized

By Monica Hatcher

Six months after the federal government began requiring consumers to get credit counseling before filing for bankruptcy, IRS audits revealed that the $1 billion nonprofit credit counseling industry is riddled with companies profiteering on those who can least afford it.

In a sweeping program to weed out organizations flouting laws governing nonprofits, the IRS on Monday said it has stripped or was in the process of stripping the tax-exempt status of 41 companies that claimed to provide educational and counseling services to consumers, but instead were in the business selling prepackaged debt management plans.

The IRS did not release the names of the companies.

Nonetheless, IRS Commissioner Mark Everson harshly rebuked the audited firms, which represent 40 percent of the industry’s revenues, calling the growing sector “the poster child of bad conduct” that has “poisoned the entire sector of the charitable community.”
Millions of Americans look to the agencies for credit counseling, debt management assistance and other financial advice.

Under the Bankruptcy Reform Act of 2005, which went into effect Oct. 15, consumers are required to seek financial counseling before filing for Chapter 7 bankruptcy.

The National Association of Consumer Bankruptcy Attorneys, which opposes the credit-counseling requirement because of the additional financial burden it places on those already distressed, said the report was cause for concern.

“We have to send our clients to these credit counseling agencies, and the IRS is pointing out that many of them have questionable business practices,” said Bradford Botes, executive director of the association.

Service fees charged
Typically, credit counseling agencies charge consumers a service fee averaging between $35 and $50, although some can receive advice for free, depending on need. If consumers enroll in a debt management plan, they also pay the agency a small percentage of their total debt to make payments to their creditors at reduced interest rates or balances negotiated by the agencies. Some agencies also collect a percentage of the recovered debt from the credit card companies.

Not everyone is taking advantage of the law.
Nick Jacobs, a spokesman for the National Foundation for Credit Counseling, defended the many agencies he said were legitimately trying to help people fix their lives, but said the IRS was right in its assessment of the industry’s problems.

Preying on consumers
“There are people out there who are preying on consumers and taking advantage. They’re casting the entire industry in a very black light, so any efforts towards weeding out those bad actors is very welcome from our point of view,” Jacobs said.
Companies that have not been audited are not out of the woods. Everson said the IRS will be sending compliance inquiries to each of the other 740 known tax-exempt credit counseling firms. The agency is also issuing expanded guidelines detailing the legal standards of exemption.

Everson recommended consumers pick one of the 150 consumer counseling organizations approved by groups like the Better Business Bureau. But bad actors may exist among them, too, he cautioned.

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