Consumer Alert Issued:
IRS and FTC Investigates
Credit-Counseling Organizations
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. |
