I hate to sound like Johnny-One-Note but … does credit counseling ever work?
Senate Report Raises Concerns about Credit Counseling Companies
According to a report issued late March by the Senate Governmental Affairs Committee’s Permanent Subcommittee on Investigations staff, the business model for the traditional nonprofit credit counseling company has changed significantly with many newer entities generating profits from for-profit subsidiaries. The report resulted from an investigation to determine the state of the credit counseling industry and to explore viable solutions to remedy problems.
In the report, entitled Profiteering in a Non-Profit Industry: Abusive Practices in Credit Counseling, many of those new organizations are “using a for-profit model designed so that ‘their nonprofit credit counseling agencies generate massive revenues for a for-profit affiliate for advertising, marketing, executive salaries, and any number of other activities other than actual credit counseling. The new model looks to the consumer to provide those revenues.”
Staff concluded this model resulted in “increased consumer complaints; such as excessive fees, nonexistent education, poor service and generally being left in worse debt than when they initiated their debt management program.”
According to the report, there is little uniformity in industry regulation with their currently being various professional, state, and federal standards; some being mandatory, others are voluntary.
The subcommittee staff offered the following findings and recommendations:
* some credit counseling agencies are engaged in abusive practices hurting debtors, including charging excessive fees, putting marketing before counseling, and providing debtors with inadequate educational, counseling, and debt management services;
* some nonprofit credit counseling agencies are funneling millions of dollars each year from debtors to insiders and affiliated for-profit businesses, possibly violating tax laws prohibiting tax-exempt charities from benefiting private interests;
* as part of ongoing efforts to halt abusive practices in the credit counseling industry, major creditors should review and strengthen their standards for credit counseling agencies with whom they do business;
* the FTC and IRS should accelerate their enforcement efforts to review suspect credit counseling agencies and take appropriate action against agencies and other who are violating restrictions on tax exempt entities or engaging in deceptive or unfair trade practices-and should consider coordinating with state enforcement agencies to make efficient use of government resources;
* the Senate should consider modifying credit counseling provisions in the pending bankruptcy legislation to strengthen protections against abusive practices, including determining whether a single authority, the U.S. bankruptcy trustee, should issue a central list of qualifying credit counseling agencies to provide counseling to bankruptcy petitioners and whether credit counseling fee limits would be appropriate; and
* the Senate should consider a bill, either modeled on the Debt Repair Organizations Act of 1996 or expanding that law’s application to reach nonprofit entities, to strengthen protections against abusive practices in the credit counseling industry.,
The staff report noted:
When profit motive is injected into a non-profit industry, it should come as no surprise that harm to consumers will follow. Indeed, the primary effect of the ‘for-profit model has been to corrupt the original purpose of the credit counseling industry-to provide advice, counseling, and education to indebted consumers free of charge or at minimal charge, and place consumers on debt management programs only if they are otherwise unable to pay their debts. Some of the new entrants now practice the reverse-provide no bona fide education or counseling and place every consumer onto a debt management program at unreasonable or exorbitant charge.