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Non Profit Debt Consolidation

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The term "non profit debt consolidation" refers to a service (which includes credit counseling and a debt management program) offered by a 501(c)(3)[1] non-profit credit counseling agency. In addition to being tax-exempt, non-profit credit counseling agencies are exempt from the Credit Repair Organizations Act (15 U.S. Code § 1679) and the FTC Act (15 U.S.C. §§ 41-58, as amended).

Nearly every credit counseling agency has a non-profit, tax-exempt status. However, these organizations often perform just like profit-making enterprises, aggressively and acritically promoting enrollment into their revenue generating services (Debt Management Plans etc.) while increasingly neglecting the free (or almost free) educational programs and counseling services, which is the reason for being awarded tax-exempt status by the U.S. Internal Revenue Service (I.R.S.).

One of the problems is that in the late 1990's creditors (credit card companies etc.) started to reduce their payments (called "Fair Share" contributions) to credit counseling agencies from 15% to 10% (or less) of the funds collected through Debt Management Programs (DMPs). This unilateral change left agencies struggling financially, cutting educational resources, charging fees to clients (monthly fees, enrollment fees, and sometimes even counseling fees, when up to the 1990s there were virtually no charges at all), and focusing more and more on enrolling as many people as possible into their DMPs, even when a more affordable educational program, community seminar, diagnostic service and basic budget counseling would have been more indicated.

Many agencies today use their non-profit status as a mere marketing tool. They showcase their non-profit label as a sign that they are trustworthy, provide impartial advise, and focused on the best interest of consumers rather than being motivated by revenue opportunities just like a for-profit company.

Non-profit debt consolidation abuse

It is unclear why some credit counseling agencies were awarded non-profit status in the past. Organizations must be "organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes"[2] in order to be exempt from paying federal taxes. This means that the main purpose of a credit counseling agency should be to educate consumers, not to provide DMPs.

In addition, most non-profit credit counseling agencies seek public charity (in addition to "non-profit") qualification in order to face even fewer I.R.S. restrictions. To qualify, an organization must either be a "Publicly Supported Organization" (which typically entails receiving at least one third of its funding from governmental entities and/or public contributions [3]) or receive income from providing tax-exempt services. This shouldn't be the case with credit counseling agencies funded by creditors' "Fair Share" contributions and debtors fees, both of which are often characterized as "voluntary" even though they don't appear to be spontaneous at all.

The ultimate question in determining whether a non-profit credit counseling organization should be awarded non-profit status is: are the Debt Management Plans (DMPs) they offer complementary to their primary activity of providing educational and counseling services or is it the other way around? And is the income generated by DMPs voluntary, similarly to a donation to a charity?

In 2003, the IRS finally began expressing concern that some non-profit credit counseling organizations might no longer qualify for tax-exempt status because they provide primarily Debt Management Plans without significant educational and counseling services. [4]

Them, starting in 2004, the IRS audited 63 credit counseling agencies (representing over half of the revenue in the sector). All the completed audits (41) resulted in revocation of tax-exempt status. [5] The remaining 740 non-profit credit counseling agencies were sent compliance inquires. Between 2003 and 2006, the IRS granted tax exempt status to only 3 credit counseling agencies out of 100 who had applied.

In any case, a reputable and honest non-profit credit counseling service can still provide help when you are struggling with debt and none of the do-it-yourself debt consolidation options appear practicable to you. They should advise a Debt Management Plan only when it is the best fit for you. Even if they charge you a monthly fee, they could save you money by renegotiating interest charges on your behalf with your creditors, alleviate your monthly payment obligations, and counsel you on money management and on how to get out of debt.

Non-profit debt consolidation scams

Don't trust a company only because it presents itself as a "non-profit." A non-profit status by itself doesn't guarantee that the company is reliable and trustworthy.

In addition, many debt settlement companies use generic terms and describe their services in such vague terms that the nature of what they offer can often be confused with debt consolidation or credit counseling, and their debt settlement plan can be confused with a debt management program (or "debt management plan").

There have been various and repeated cases of debt counseling [6] [7] [8] or debt settlement companies [9] falsely claiming non-profit status or funneling funds to for-profit companies rather than operating for charitable purposes as advertised. The FTC charged several companies for making false or deceptive claims, violating the Telemarketing Sales Rule (TSR), including the National Do Not Call Registry provisions, by taking advantage of their non-profit status, or violating the Gramm-Leach-Bliley (GLB) Act by not informing consumers about their information-sharing practices.[9]

These alleged non profit debt consolidation companies scammed consumers out of over $100 million, with over 98% of consumers non completing the debt negotiation program they had enrolled into and ending with less money, more debt, and a damaged credit report.

Some non-profits have been found to be outsourcing the majority of their operations to for profit companies with the same ownership, effectively transferring profit in the millions of dollars to themselves, while obtaining "voluntary contributions" from clients which were all being enrolled in the same Debt Management Plan regardless of their specific needs and were not provided with any debt counseling [10] .

How to find a reputable non-profit credit counseling organization

A "non-profit" status doesn't necessarily translate in quality and convenience (or even legitimacy) of the service offered, so you need to do your homework to locate a non-profit organization that will truly provide an honest and fairly priced service.

The best bet is probably to look within the member agencies accredited by the National Foundation for Credit Counseling (NFCC), which was established in 1951 and is historically the most reputable nonprofit credit counseling organization.

In the "Companies" sections we provide a list of NFCC accredited Credit Counseling agencies

Hidden Fees (or charged as donations)

Some companies might tell you over the phone or on their website that their services are "free" or that is there is only a voluntary charitable contribution (or donation) involved. Be sure to pressure them with follow-up questions and read the agreement very carefully, as you might find out that there are indeed fees involved (sometimes so high that the program is not worthwhile anymore), and that the so called voluntary contributions are mandatory (and therefore just another name for "fees").


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  1. Exemption Requirements - 501(c)(3) Organizations. Internal Revenue Service (IRS).
  2. Internal Revenue Manual - 7.25.3 Religious, Charitable, Educational, Etc., Organizations. Internal Revenue Service (IRS).
  3. Publicly Supported Charities. Internal Revenue Service (IRS).
  4. IRS Takes Steps to Ensure Credit Counseling Organizations Comply With Requirements for Tax-Exempt Status. Internal Revenue Service (IRS). October 17, 2003
  5. IRS Takes New Steps on Credit Counseling Groups Following Widespread Abuse. Internal Revenue Service (IRS). May 15, 2006
  6. "AmeriDebt Founder Settles FTC Deception Charges."Federal Trade Commission. September 13, 2006.
  7. "FTCs AmeriDebt Lawsuit Resolved: Almost $13 Million Returned to 287,000 Consumers Harmed by Debt Management Scam." Federal Trade Commission. September 10, 2008.
  8. "FTC Recovers Additional $2.1 Million for Consumers Defrauded by AmeriDebt Scam." Federal Trade Commission. March 15, 2011.
  9. "Debt Services Operations Settle FTC Charges" Federal Trade Commission. March 30, 2005.
  10. Madigan, Grillo File Suit Against Cambridge Credit; Non-Profit Debt Counseling Service Allegedly Charged Illinoisans Excessive Fees, Funneled Earnings Though For-Profit Subsidiaries. Illinois Attorney General. April 21, 2005