Credit counseling agencies are blurring the line between for-profit and nonprofit

The credit counseling industry has received a lot of press lately. Thanks to the Bankruptcy Abuse and Consumer Protection Act, which redefined Federal bankruptcy law, consumers are now required to undergo counseling as a prerequisite to a bankruptcy filing. This was intended by Congress to be a helpful step, as many consumers lack even the most basic knowledge about how to handle household finances.

Unfortunately, this process has been confused considerably by some in the industry who are seeking to take advantage of the misfortune of others. While the required counseling must be obtained from agencies that are approved by the US Trustees, some agencies are falsely promoting themselves as approved. Others are portraying themselves as being nonprofit credit counseling agencies when they are, in fact, just fronts for companies that are in the business to make a profit.

The Credit Repair Organizations Act, passed by Congress in 1996, was designed to help protect consumers from predatory credit repair companies. Many such companies offer to help eliminate debt and require hefty signup fees from their customers. The customers often assume that the fees will go towards paying their debts, only to discover later that the agencies have kept the fees as profits. This only lands the consumers in more debt than when they started, which hurts their credit report even more. The Credit Repair Organizations Act was written to apply only to for-profit agencies; nonprofit agencies were exempt.

A recent ruling by a Federal judge in Maryland has changed this, however. U.S. District Judge Peter J. Messitte has ruled that nonprofit counseling agencies may be subject to regulation under the law. This ruling was issued due to a class action suit filed by a number of customers of a particular nonprofit counseling agency that discovered that the “voluntary” contributions they were making to the agency were actually being funneled to a for-profit company that was affiliated with the agency.

These “contributions” wee ruled to be fees, and the Act requires that agencies not charge fees to their customers until they have provided a service. Nonprofit agencies frequently ask for contributions up front, and these contributions, which many customers assumed were being used to reduce their debt, ran as high as $1000.

Organizations that violate the Act may be forced to return the contributions to the customers.

This ruling is just one of many that may come this year as a number of lawsuits have been filed against the counseling industry. This industry, which is now a mandatory part of the process of filing for bankruptcy, is still largely unregulated by either the Federal or state governments. This leaves a lot of room for fraud; the most common version is to pose as a nonprofit agency in order to avoid what little Federal regulation exists. This recent ruling may put an end to that, but it is certainly not the last case of fraud that will appear before Federal judges.

Those considering applying for assistance are urged to choose their credit counselor carefully.

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