Why Are Credit Card Counseling Companies Not for Profit?

According to Credit Card Nation, credit counseling agencies are nonprofits because state laws require them to be. However, due to many complaints by consumers about fraudulent practices at credit counseling services, the Internal Revenue Service since 2008 has been revoking nonprofit status from most of the credit counseling agencies they are auditing and refusing to grant nonprofit status to 98 percent of new applicants.

History

Credit granters formed the National Foundation for Credit Counseling in 1951 to promote financial responsibility among the general public. The Association of Independent Consumer Credit Counseling Agencies was formed in 1993 with a goal of creating standards of ethical conduct among credit counselors, including all those in the NFCC. The NFCC disagrees with the AICCA on the issue of customer interaction; the AICCA believes face-to-face interviews are necessary, while the NFCC favors debt management by phone. The American Association of Debt Management Organizations was founded in 2003 and is an industry organization advocating for the operation of credit counseling organizations.

IRS Crackdown

The IRS is cracking down on non-profit credit counseling agencies in response to consumer complaints and is basing its rulings on the premise that agencies are not performing a public service, as nonprofits must, but rather functioning as debt collection agencies. Part of the criteria for nonprofit status is education and counseling of the consumer. The IRS claims that credit counseling agencies have not been providing this and instead have been pressuring consumers for "voluntary donations" and rushing them into debt management plans without adequate education.

Significance

According to Credit Card Nation, there are currently no for-profit credit counseling agencies in existence in the U.S. They also state that nonprofit credit counseling agencies receive up to two-thirds of their funding from creditors and that the IRS rulings combined with state laws will effectively put them out of business.

Legitimate Counseling Agencies

The Federal Trade Commission has prosecuted over a dozen credit counseling agencies and has issued Fiscal Fitness, which provides information to help consumers find legitimate agencies. The Better Business Bureau has also issued consumer warnings and has provided Tips on Choosing a Counseling Agency for consumers seeking debt relief.

Credit Card Debt Relief

The FTC recommends budgeting, debt consolidation, debt management, and bankruptcy as options for debt relief. The consumer must decide if they can handle the problem on their own or if they need the help of a credit counseling agency.