Consumer Credit Counseling Laws

People have become increasingly wary of credit counseling companies because of wide-spread dishonesty. Many paid high fees for services that were not delivered, and law suits were filed against them causing many to go out of business. However, millions of people have benefited from the services they provide, to such an extent that federal bankruptcy laws were changed, and the Consumer Protection Act passed in 2005, requiring credit counseling companies to comply with several criteria.

Nonprofits Only

Almost all credit counseling companies have 501(c)(3) status, meaning they are nonprofit organizations. This status was granted by the IRS because the bulk of what they offer is educational in nature. The new laws requires that only companies with that designation are qualified to render services.

Independent Oversight

To qualify under the new laws, a credit counseling company must have a board of directors with people who have no stake in the profits of the company. Furthermore, the people with customer contact must receive appropriate training, and they must demonstrate that they have adequate experience in dealing with financial affairs.

Full Fee Disclosure

A credit counseling company must inform the prospective customer of both the fees that they charge and provide information about fees they receive from creditors. Many credit counseling companies have arrangements with major issuers of credit to pay them fees for the services they provide, calling attention to potential conflicts of interest.

Adequate Resources

Many credit counseling companies negotiate settlements with creditors that require their customers to make monthly payments to them that, in turn, are sent to the creditors. To qualify under the laws, a credit counseling company must demonstrate that it has adequate resources to support those payments for the lives of the repayment plans.

Audits

To qualify under the new laws, credit counseling companies must undergo annual audits of their trust funds that hold payments of customers who have agreed to a debt repayment plan. In addition, every company has to show evidence that their employees who have customer contact are bonded.

Accreditation

In addition to the new laws, most major credit counseling companies are members of either the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. Both organizations strictly enforce their codes of ethics on their memberships, and none of their members have been censured by the courts or by the IRS.