The
Internal Revenue Service and Federal Trade
Commission announced a joint advisory, warning
consumers of some of the pitfalls of Credit
Counseling. They plan to team up to
investigate both deceptive practices of the
industry and the often-misleading nonprofit
status of some of these credit-counseling
agencies.
"Consumers
who are struggling financially need to be
careful not to lose even more money to someone
offering a quick and easy way to fix credit
problems," said Timothy J. Muris,
Chairman of the FTC. "We want all
consumers seeking help to take some common
sense precautions."
The
IRS, FTC, and State agencies urged consumers
to be wary when choosing a credit counseling
organization. A large number of complaints
from consumer advocate groups have alerted
these groups of some of the deceptive
practices and hidden costs associated with
some credit counseling agencies. Consumer
complaints have centered on high fees, hidden
charges, and the lack of actual help these
organizations have been able to offer.
The
IRS is concerned that some credit counseling
agencies are abusing their status as "tax
exempt organizations" in order to avoid
state and federal consumer protection laws.
Many credit-counseling agencies have been able
to operate using deceptive practices and hide
under their "nonprofit" status. As
nonprofits, the agencies are now exempt from
dozens of state and federal regulations.
The
IRS also warns consumers that a
"nonprofit" status does not ensure
the quality of an organization; it is merely a
tax code classification. Consumer groups have
also criticized the large salaries of many of
the credit counseling agencies' executives.
"Consumers need to know not to read too
much into not-for profit status - that's no
guarantee that someone is legit," said a
director of the FTC's Midwest Operations.
The
IRS has begun auditing some credit counseling
services to see if they meet the criteria for
their nonprofit status. To obtain tax exempt
status, a credit counseling agency must limit
its services to poor customers or must
primarily provide education and counseling to
the public. Many credit counseling agencies
have been criticized for focusing on higher
profitability and just acting as a middle man
funneling money to the creditor and just
taking a cut of the payments. The IRS said
that simply enrolling people into payment
plans is not enough. They also plan to more
aggressively screen new applicants from credit
counseling organizations.
There
is heightened concern as more and more
consumers enter into credit counseling
programs. The number of consumers involved in
some sort of credit counseling sky rocketed to
an estimated 9 million in 2002. This number is
expected to grow as more and more consumers
will be required to undergo some sort of
credit counseling prior to filing bankruptcy
under the proposed new bankruptcy laws.
