Nonprofit credit counseling services are in a jam. Due to hundreds of consumer complaints, the IRS began investing the tax-exempt status of 60 credit counseling services; so far, 30 of them have had their tax-exempt status revoked.

Credit counseling agencies make their money in large part from the banks and creditors. They receive funds based on the amount of money they can get their clients to pay. This has called into question their loyalties, since they make more money if they get people to pay more to their creditors. Consumers have also complained that the credit counseling agencies were too pushy and did not educate them properly about their debt.

As mentioned in our list of Top 10 Things to Avoid in credit and debt agencies, a non-profit or tax-exempt status does not mean that a company’s services are free. Often, as people found out and complained about, there are high fees associated with the programs.

This does not mean that all credit counseling agencies are bad. In fact, there are many honest services that help people get out of debt every day. The revocation of their tax-exempt status does not mean that these agencies will necessarily go out of business, it just means that they will have to start paying taxes.

It is important to note here the difference between debt settlement and credit counseling agencies. Debt settlement is different from credit counseling. Debt settlement agencies do not work for your creditors and are usually not nonprofit organizations.

This new regulation of nonprofit credit counseling agencies will be interesting due to its timing. Under the new bankruptcy laws that went into effect in October, people are required to work with a credit counselor before they can file for bankruptcy. Now, with the IRS’s auditing of many credit counseling agencies, people should be careful when choosing a company to work with. Also, while these new tax restrictions may not put all the affected credit counseling agencies out of business, it may cause some of them to close their doors.

So the lesson to walk away with is to be careful about what agencies you choose to work with. Remember that nonprofit does not mean that they will help you for no charge and their motives are often colored by the fact that they are paid by your creditors.

This entry was posted on Thursday, January 19th, 2006 at 6:25 pm and is filed under Credit. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.