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Credit counseling agencies may lose tax-exempt status; consumers may be hurt
The credit counseling industry has become a key cog in the process of filing for personal bankruptcy. Long considered a useful, but nonessential, tool, credit counseling is now mandatory for any consumer who wishes to file for bankruptcy under either Chapter 7 or Chapter 13 of the Federal bankruptcy code. As such, it is of vital importance that this counseling be available to those who need it, when they need it.
The availability of such help could be a problem for consumers and debtors as the Internal Revenue Service continues its investigation into the industry. It appears that nearly three dozen firms, including those that make up the bulk of the industry in terms of revenue, may soon have their tax exempt status revoked.
Many of these agencies do business as nonprofit organizations. In exchange for nonprofit status, the United States government grants them a tax-exempt status and they do not have to pay income taxes. As we have reported elsewhere, the “nonprofit” description is often misleading. While the agencies are not-for-profit, they are often closely affiliated with, or even owned by, for-profit companies. In practice, the nonprofit agencies try to encourage their clients to enroll in debt management programs that are run by their for-profit affiliates. So the agencies are, in effect, revenue producing arms of the for-profit companies. In addition, some firms are being investigated for charging fees that are too high, pressuring consumers into signing up for expensive (and often harmful) debt settlement plans, and for providing education that the IRS deems inadequate.
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