Millions of Americans have run into debt trouble in recent years. Many of them turn to consumer credit counseling organizations for assistance. In fact, attending a consumer credit program is a requirement for individuals filing for bankruptcy. However, not all consumer credit counseling organizations are created equal. Before you sign on with a specific outfit, take some time to understand the industry.
Credit Counseling vs. Loan Consolidation
Many credit counseling organizations do great service, offering unbiased, impartial and expert advice to consumers overwhelmed with debt problems. They are frequently able to help clients work with creditors, obtaining favorable settlements or lower, more manageable debt payments. Some outfits, however, have attracted the scrutiny of regulators, because they provide little benefit to consumers. In some cases, they signed customers up for expensive debt consolidation loans, often causing their clients to be in worse shape than they were before.
Regulation
Generally, consumer credit organizations are regulated at the federal level, which places strict limits on the activities of credit counseling firms. For example, firms must provide a full disclosure, in writing, of all fees and costs associated with their services. They can also not collect money from the client until after they have delivered on their promises made in the contract.
IRS Regulation
Many credit counseling organizations have filed for tax-exempt status as 501(c)3 organizations. This is a special section in the tax code that provides important tax advantages for nonprofit organizations, such as educational groups, churches and other religious organizations and charities. The IRS has been placing a good deal of scrutiny on some credit counseling organizations, however, for acting like for-profit institutions. They have moved away from their focus on education and advocacy, and instead have emphasized credit repair and selling commercial loan services, in violation of their 501(c)3 charter. The Credit Counseling Compliance Project is an IRS initiative that reviews the activities of credit counseling services, and, where appropriate, revokes their tax-exempt status.
What You Should Expect
As a consumer, you can expect your consumer credit counseling agency to comply with the law. They must be nonprofit institutions under state law, they must charge fees that are reasonable, and they must provide full disclosure of these fees and charges in advance. If they handle money on your behalf, their employees must be bonded, and they must have the financial strength and stability to remain operational throughout the life of any payment plan they support.
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