Statement of American Association of Debt Management Organizations
About The American Association of Debt Management Organizations
The American Association of Debt Management Organizations (AADMO) is an industry trade association representing the nation’s independent debt management organizations. Founded in 2001, AADMO's focus has been on industry education with an emphasis on regulatory and compliance issues affecting its members.
AADMO is the credit counseling and debt management industry's largest trade association and has as its mission to promote and ensure the continued operation and viability of credit counseling and debt management organizations. AADMO provides its members and the consumer public with information about the credit and debt counseling industry. AADMO members are debt management organizations, personal finance educators, credit and debt information publishers, credit counselors, consumer lawyers and many others.
AADMO is the only trade association to have held state law compliance workshops with the New York State Banking Department and the California Department of Corporations prior to enactment of their respective laws governing credit counseling. AADMO is also the only trade association for the industry to publish a formal summary of state laws that has been reviewed by state regulators.
Copyright © 2005 AADMO
Table of Contents
Introduction
Overview Credit Counseling Agencies’ Commitment to Education
Educational Aspects of the Debt Management Plan
Identifying the Beneficiaries of Debt Management Plans
Volunteer Staffing and the Credit Counseling Process
The Potential Impact of IRS Revocation of Credit Counseling’s 501(c)(3)
Tax-Exempt Status on Credit Counseling Agencies and American Consumers
Recommendations
Introduction
Since their creation, non-profit credit counseling agencies (CCAs) have provided invaluable assistance and education to American consumers in financial distress. For over twenty-five years, the Internal Revenue Service and the courts have recognized the educational work of CCAs by confirming their tax-exempt status pursuant to Section 501(c)(3) of the Internal Revenue Code. The explosive growth of unsecured consumer debt over the last fifteen years has increased the need for credit counseling, and the need for debt management plans (DMPs) which CCAs administer. This explosive growth has caused change and growth within credit counseling; it has also created an opportunity for abuse by some CCAs. The now notorious conduct of a few CCAs has caused the IRS to consider revoking tax-exempt status to all CCAs, including those who continue to fulfill their educational purpose. Such blanket revocation would be a drastic overreaction. Blanket revocation would fail to recognize the continued educational work of credit counseling, and the important role credit counseling plays in assisting financially distressed and vulnerable American consumers and in protecting all Americans from an epidemic of bankruptcy filings such as has never been seen.
Overview
Over 1.6 million Americans filed for personal bankruptcy in 2003[1] and another 1.6 million through the period ending September 30, 2004. Generally, the number of consumers declaring bankruptcy has increased by nearly 10% each year over the last several years.[2] These are alarming statistics. Of even greater concern for policymakers are the millions of Americans and American families on the verge of bankruptcy, or at a point of financial distress where there appears to be little hope and few options. The well-being of our national economy is threatened if these people choose bankruptcy in ever-growing numbers. Most consumers do not want to choose bankruptcy, but they need real help with their immediate financial distress and their long-term ability to understand and manage their finances. Whether they succeed or fail affects not only the debtors themselves but their children, their employers, their communities, and the national economy.
Increasingly, financially distressed families have turned to non-profit credit counselors for relief from financial distress. In 2001, nearly 2.5 million consumers sought the assistance of credit counseling agencies. In 2004, it is estimated that closer to seven million people sought assistance from a credit counseling organization.[3] These numbers dwarf the already high numbers of bankruptcy filings, and make two facts undeniably clear: a substantial number of American families are in serious financial distress, and a substantial number of those distressed Americans are primarily burdened by unsecured credit card debt. If these Americans are abandoned, we risk a bankruptcy catastrophe.
Historically, the non-profit status and eligibility for 501(c)(3) tax exemption of credit counseling agencies was confirmed by the IRS and the courts in a series of early decisions. At that time, the model for credit counseling agencies reflected the nature and magnitude of the problem: small, community-based agencies who could provide helpful advice and general education to the many and tangible assistance to the few. The helpful advice and general education included one-on-one sessions or lectures to groups on subjects such as family budgeting, expense reduction, and balancing a checkbook. The tangible assistance took the form of the debt management plan, which is discussed in greater detail below. Debt management plans provided financial resources to the CCA in the form of creditor “fair share” (again, discussed in greater detail below), but because the problem was small, a CCA would look for and receive funding from other sources as well; a commonly cited example is the United Way.
The past thirty-five years have seen an explosive growth of consumer credit. Between 1970 and 2004, consumer debt in the United States increased from 131 billion to over 2.05 trillion dollars.[4] Consumer credit is an essential element of the consumer-driven American economy, and the availability of credit is essential to the stability and self-improvement of millions of Americans. At the same time, the aggressive marketing of credit cards to consumers has become an accepted part of the credit card issuer’s business model. With unsecured consumer debt being higher than ever and more concentrated than ever on less-than-perfect American consumers, that part of the American financial spectrum populated by consumers in financial distress tied directly to unsecured debt has grown substantially.
Over this time, credit counseling agencies grew in size and in number to meet the increased demand for their services, and in particular the increased demand for the tangible assistance of a debt management plan. CCAs developed new practices to reflect the new economies for credit counseling, and their increased role as financial trustees dictated that many CCAs took on a more professional business approach, departing further from the “church basement” model of a charitable organization. As more consumers came to CCAs needing the tangible assistance of a debt management plan, the “fair share” payments by creditors slowly displaced charitable support from other groups such as the United Way. CCAs moved increasingly toward a telephone-based counseling relationship, which permitted consumers to obtain counseling from home and on the consumer’s schedule, without the need to take the day off work and arrange day care for children. CCAs also generally found that to the extent these distressed American consumers were embarrassed or ashamed at having gotten into such trouble with consumer debt, telephone counseling was less humiliating to these consumers, encouraged greater candor, and created a more productive platform on which to base counseling and educational efforts. Clearly, the move by CCAs toward a telephone-based counseling relationship also permitted CCAs to reach larger geographic regions.
Creditors also made adjustments, reducing their “fair share” contributions to reflect the economies of scale now common at CCAs. Credit card companies also encouraged CCAs to develop modern business practices, including computerized client data management systems and electronic payment systems.
Unfortunately, the rapid growth and reshaping of credit counseling also permitted the emergence of some of the worst-behaving entities in credit counseling. These worst entities abandoned any commitment to education, and moved fully into the mode of indiscriminately marketing Debt Management Plans to the general public. At one end of the consumer spectrum, they invited American consumers who were otherwise able to pay their credit card debt, at the contractual rates of interest, to use the debt management plan as a means of paying less than the agreed-on rate. This indiscriminate marketing of the debt management plan offended credit card companies, who historically had made substantial concessions to consumers on debt management plans – slashing interest rates or eliminating interest altogether, waiving accrued fees and penalties, and re-aging a consumer’s delinquent account as a current debt.
Credit card companies responded to the indiscriminate marketing of debt management plans by limiting their concessions and further reducing their “fair share” contributions. Both of these moves had the unintended effect of hurting legitimate CCAs more than they hurt the worst players (who had no resources devoted to genuine education and counseling, who would always operate more leanly than legitimate CCAs, and who were constantly increasing their “market share” through aggressive and dishonest marketing). Where the worst CCAs had never committed to education, many legitimate CCAs struggled to meet their educational commitments with reduced creditor support. More significantly, the reduction in creditor concessions came to mean that the debt management plan provided a less substantial benefit to those Americans who desperately needed it. This fact did not matter to the worst CCAs, who have shown a willingness to aggressively market Debt Management Plans by promising what they cannot deliver.
At the other end of the consumer spectrum, the worst CCAs marketed their Debt Management Plans to consumers who were so deeply in financial distress that bankruptcy was the only reasonable solution. These worst CCAs did not care that these consumers would be squeezed for their last few dollars before seeking bankruptcy protection; they did not care that the consistent failure of these consumers would eviscerate the CCA’s retention rates for its Debt Management Plan. All the worst CCAs cared about was signing consumers up and getting exorbitant startup and monthly fees for as long as they could, regardless of the long-term effects on the consumer, the creditors, or the economy.
Not all the worst CCAs were “home-grown” products; a number of them were escapees from other legitimate attempts at consumer-friendly regulation. The Credit Repair Organizations Act and the National Do Not Call Registry are two examples of laws which prohibit certain predatory and/or deceptive practices, but which do not apply to non-profit organizations. It is widely claimed that a number of predatory and dishonest business entities took on the mantle of non-profit status in order to escape the application of these laws.
The primary source of regulatory oversight of credit counseling has been the various states. Some states do not regulate credit counseling at all.[5] Of the states that do, their laws often lack clarity and uniformity. Banks issue consumer credit on an interstate basis, and consumers freely move from state to state taking their unsecured debt with them. The growing need for credit counseling is not a local problem, and the growth of credit counseling has lessened the local quality of many credit counseling agencies. Nevertheless, these agencies still must contend with the divergent and/or redundant requirements of the various states’ laws (including various requirements as to licensing, bonding, insurance, disclosure, and other compliance issues). At the same time, enforcement of these various states’ laws is insufficient, ineffective, or altogether absent. What this means is that CCAs that intend to comply with the applicable laws have been burdened with exhaustive legal compliance costs[6], while the worst CCAs were able to ignore legal compliance without fear of effective enforcement.
In a climate of explosive growth, rapid development, and ineffective regulatory oversight, the conditions were ripe for the worst CCAs to take a controlling position in the world of credit counseling. For every dollar that a legitimate CCA spent on genuine education and counseling, the worst CCAs had a free dollar they could spend on marketing. Nevertheless, other CCAs grew in size and geographic range, moved toward a telephone-based counseling relationship, and adopted a more professional business approach, yet remained true to their fundamental educational and charitable purposes.
Regrettably, it was the worst CCAs who of course finally caught the attention of the public, the IRS, and other regulators. These worst CCAs had a number of features that were shared by other CCAs which had grown and developed over time: they were large, telephone-based, they followed a professional business model, and they aggressively marketed their services. These are features that would not have been found the last time the regulators looked meaningfully at credit counseling agencies. Yet these features were not the ones that cried out for regulatory action against these worst CCAs: it was the fact that the worst CCAs were dishonest, predatory, and abusive to consumers. Their commitment to education was non-existent. Their marketing was widespread and dishonest. These worst CCAs promised what they could never deliver, then failed to deliver even what they could. They charged exorbitant upfront fees, which reflected a business model that focused on signing new consumers up for services, and did not focus as much (if at all) on actually providing those services. These worst CCAs not only failed to be legitimate 501(c)(3) educational or charitable organizations; they failed to even be legitimate businesses.
The current challenge to the IRS is to immediately address the status of these worst CCAs without letting the conduct of these few entities cloud IRS’ understanding of the explosive growth of consumer debt and the corresponding growth and development of non-profit credit counseling.
As the IRS steps back in to provide regulatory oversight and guidance to these agencies, it must recognize that the core values and practices which originally justified 501(c)(3) exempt status for credit counseling still exist in modern CCAs. The fact that specific practices have changed or developed reflects changes and developments in our world, not an abandonment of those core values and practices.
Credit counseling agencies still provide low cost or free financial education and counseling to the public and still provide tangible assistance in the form of debt management plans to those American consumers for whom such plans are appropriate. Credit counseling agencies still provide a positive option to collection actions, lawsuits, and bankruptcy. The ability of legitimate credit counseling agencies of any size to carry on their educational and charitable purposes still depends on their continued status as 501(c)(3) organizations. Without this tax status, credit counseling agencies will no longer be able to provide financially distressed consumers with the affordable and reliable services they desperately need. A decision by the IRS to revoke 501(c)(3) status to all CCAs based on the abusive practices of the worst CCAs would be factually and historically baseless, and would have disastrous unintended consequences on American consumers and the American economy.
Credit Counseling Agencies’ Commitment to Education
From their inception in the 1950s, credit counseling organizations have engaged in public education and have provided consumers with access to financial literacy programs. This commitment to education has always been, and should always be, an essential component to the maintenance of the 501(c)(3) tax-exempt status granted to credit counseling organizations. Credit counseling agencies seeking to obtain and retain 501(c)(3) status should devote a preponderance of available resources to the development, procurement and dissemination of client and community oriented financial literacy programs.
Each year, millions of financially distressed American households use the credit counseling and debt management services of CCAs, inclusive of their educational components. With proper oversight and guidance from the legislative and regulatory community, non-profit credit counseling organizations will continue to rehabilitate and educate financially distressed consumers.
Educational Aspects of the Debt Management Plan
It is difficult to teach long-term financial accountability to people in short-term, immediate financial distress. Distressed consumers typically seek immediate relief from their financial crisis, but what they really need is long-term behavioral change. Behavioral change is undeniably an educational goal. A debt management plan, when used appropriately, can serve both these short-term and long-term goals and is the best available educational tool for credit counseling.
In the short term, the debt management plan provides a “safe harbor” for the distressed consumer, who is otherwise consumed by fears over unpayable bills, creditor calls, collection agency calls, legal actions, late fees, over the limit fees, “default” credit card interest rates and, more generally, the fear of being financially out of control, in free fall, and on the verge of bankruptcy. This “safe harbor” permits the distressed consumer to look past “quick fixes”: avoidance behavior (i.e. avoiding calls from creditors or collection agents), problem-shifting behavior (i.e. shifting old credit card debt onto new credit cards, or shifting unsecured credit card debt into secured home equity loan debt), or ultimately hopeless behavior (bankruptcy). This “safe harbor” gives the consumer the short-term practical stability necessary to begin to take long-term responsibility for the consumer’s financial situation, with hope for the future. This stability extends to all aspects of the consumer’s life, including the consumer’s family and employment.[7]
In the long term, the debt management plan can provide education that is both informational and practical. The informational aspect begins with the first counseling session. A distressed consumer often does not have a working budget of personal income and expenses. A first counseling session should accomplish this goal (and must accomplish this goal if the CCA is going to claim that it only recommends a debt management plan to appropriate consumers). The informational aspect should continue throughout the debt management plan and beyond, and should touch on a wide range of issues in personal finance. Whether it does continue is a measure of the commitment to education of the individual CCA. The practical aspect is the consumer’s exercise of living within a budget and incrementally paying down credit card debt with a long-term goal of paying the debt off. The CCA works with the consumer to understand how the debt management plan will work; to encourage the consumer to stay on the plan; to assist the consumer when new challenges make it difficult to stay on the plan; and to share the consumer’s sense of accomplishment as steady, incremental payments begin to produce substantial reductions in the consumer’s debt, a goal which the consumer once felt incapable of reaching.
By the end of a successful debt management plan, the consumer has learned from the practical experience of living within a budget. The consumer has accomplished the goal of reducing his or her debt. The consumer has gained factual information, ongoing access to educational resources, and a better understanding about budgeting and debt. The informational and practical aspects of education through the debt management plan combine to encourage the consumer’s long-term behavioral change and to ensure that these consumers, and their children, will not only get out of financial distress, but will not get into financial distress again.
Identifying the Beneficiaries of Debt Management Plans
Public benefit is simply the sum total of private benefits, when the benefits are numerous and broad in scope. For example, a halfway house for recovering drug addicts can narrowly be said to only provide private benefits to recovering drug addicts, a particularly narrow target audience, yet it takes very little consideration to realize that the families of these individuals also benefit, as does the community at large. Often the best way of identifying who benefits from a solution is to identify who is affected by the problem.
The American economy is a consumer-driven economy. The easy availability of credit to American consumers has become a necessary component of our economy, and credit card issuers have been largely unregulated in their marketing of credit to consumers. It is a predictable side effect of the easy availability and constant marketing of credit that some American consumers will end up in financial crisis because they overuse credit. As consumer credit card debt has exploded, the number of consumers in financial distress has predictably followed suit. When these distressed consumers cannot pay their credit card debts, it is not only the creditors that are affected. The distressed consumers are affected, by the wide range of negative financial events including higher fees, collection actions, legal actions, and bankruptcy. The consumers’ families are affected, as it is known that financial distress is one of the leading causes for the breakup of families. The consumers’ employers are affected, as employers recognize that financial difficulties are a leading cause of decreased employee productivity, increased absenteeism, and increased turnover. Responsible consumers at large are affected, as creditors increase the cost of consumer credit to account for the cost of bankruptcies and write-offs. Ultimately the economy as a whole is affected, as the increased cost of credit discourages consumer activity.
Credit counseling agencies are asked by consumers to assist and intervene in a pre-existing contractual relationship between the consumers and their creditors, where the creditors already have a contractual claim for repayment of a large and growing amount of debt. When administering debt management programs, credit counseling agencies fulfill a four-part role; acting as the agent, advocate, counselor and educator of financially distressed households. The immediate tangible benefits that a credit counseling agency can provide to its client, the consumer, can be measured by the concessions that the CCA obtains from the consumer’s creditors, i.e. the agreement by the creditors to accept less from the consumer than that to which the creditors are otherwise entitled pursuant to their contracts with the consumer.
To treat the creditor’s acceptance of less than the contractual amount as a benefit to the creditor is arbitrary. A CCA which asked a consumer’s creditors to accept nothing, i.e. to simply write off a consumer’s debt entirely, would be rejected by the creditors, and would be unable to provide any real benefit to the real beneficiary – the consumer.
Often the notion that a debt management plan confers a substantial private benefit on creditors is coupled with the accusation that CCAs are merely “collection agents” for the credit card industry. Anyone making this accusation has not been through a collection process, and does not understand it. In collection, the creditor writes off a debt, and writes off the consumer. The collection agent buys the debt, for pennies on the dollar. The collection agent does not work with the consumer to create a budget or to address the full range of the consumer’s debts. The collection agent has no concern about the impact on the consumer of the collection process, and devotes no time to addressing the consumer’s underlying financial management issues. In collection, various collection agents compete with each other to get a greater share of blood from a stone. The stone is the consumer. Collection is a degrading process.
While creditors do make a business decision to participate in debt management plans, the CCAs administering those plans are focused on the current and future financial well-being of the consumer.
The long-term educational work of credit counseling agencies, directed at clients on debt management plans, at non-DMP clients, at high school and college students who have not yet taken on credit card debt, and at the public at large, is substantially funded by creditor payments. These are often called “fair share” payments. As noted, the creditors who have aggressively marketed consumer credit share some responsibility for the explosive increase in the number of consumers in financial distress.
It is perfectly appropriate for these credit card issuers, as opposed to the public at large or charities such as the United Way, to take financial responsibility for funding the efforts of credit counseling agencies. The voluntary agreement by credit card issuers to take financial responsibility for a side effect of the product they market is certainly preferable to the approach of others, for example the tobacco industry, who denied the existence of a problem caused by their product, and let the public pick up the tab until they were forced to take responsibility.
The explosive growth of consumer credit caused the attendant growth in the numbers of consumers in financial distress and the number of consumers seeking the assistance of credit counseling. Undeniably, because the problem is large the numbers involved are also large. Large amounts of money are paid to creditors through debt management plans, and large amounts of money are paid by creditors to CCAs through “fair share” payments. Large numbers, however, do not equate with a fundamental change in the educational mission of credit counseling agencies, any more than the explosive growth in the number of colleges, and the larger amounts of money involved in college education, has changed their fundamental purpose.
When CCAs were first approved for 501(c)(3) status, CCAs were heavily controlled by creditors, creditor representatives sat on CCA boards of directors, and creditor “fair share” payments were typically set at 15 per cent of revenues paid through debt management plans. Today, credit counseling agencies are more independent of creditors, creditor representatives do not sit on CCA boards, and creditors pay “fair share” that is not only at an historic low percentage, but also based on a wider range of factors more directly focused on the CCA’s commitment to education. While the numbers have gotten larger, the commitment to credit counseling’s educational purpose has remained the same and, at least at the better CCAs, only gotten better.
Consumer credit, just like banking, is a public concern made up of millions of private concerns. Legislators and regulators sometimes prefer to treat banking issues and financial issues as private issues until such time as the private issues fester into public crises, like the Great Depression or the savings and loan scandal. Consumer debt today threatens to become another crisis. The proponents of bankruptcy reform recognize this fact.
Credit counseling is not the problem. It is part of the solution, and benefits all Americans. It is worthy of continued 501(c)(3) status. Increased regulatory oversight is of course appropriate; revocation of 501(c)(3) status is not.
Volunteer Staffing and the Credit Counseling Process
At one time, a consumer’s issues with unsecured debt typically involved no more than three credit cards. Today, it is not surprising for a consumer to come to a CCA with twenty or more credit cards; the average is approximately ten. The range of issues relating to these credit cards has increased and become more complex, and the range of other consumer issues has changed in the same way. As a single example, thirty years ago the relationship between credit and divorce was not the issue that it is today. Moreover, the increased extension of unsecured credit card debt means that a consumer is often coming to a CCA with tens of thousands of dollars in unsecured debt. There is simply more at stake.
Because the size of and complexity of the problems have grown, a reliance by CCAs on volunteers would be not only impractical but irresponsible. Errant financial analysis or advice given by a well-meaning volunteer could have disastrous consequences for a consumer already on the brink of bankruptcy. Many CCAs rigorously train and educate their counselors. Indeed, many states require counselors to be certified as having demonstrated certain financial literacy skills.[8]
Moreover, many CCAs following best practices attempt to establish ongoing, long-term relationships between clients and individual counselors, because experience supports the belief that the client benefits more with a counselor who knows the client’s story and progress. Reliance on part-time volunteers would diminish these benefits. Finally, effective credit counseling is based on a consumer providing detailed financial information to the counselor. Given current real concerns over privacy and identity theft, it is unreasonable to entrust such information to volunteers.
The Potential Impact of IRS Revocation of Credit Counseling’s 501(c)(3) Tax-Exempt Status on Credit Counseling Agencies and American Consumers
Financially distressed American consumers are in great need of short-term assistance and long-term education. They are also extremely vulnerable to the predatory practices of unethical organizations. As recent history makes clear, credit counseling is not immune from invasion by unethical organizations looking to make a quick buck at the expense of those who desperately need help. Greater regulatory oversight and effective enforcement is clearly needed. However, IRS revocation of credit counseling’s 501(c)(3) tax-exempt status will not accomplish these goals. Instead, revocation will hurt legitimate credit counseling agencies, hurt vulnerable consumers, and hurt the American economy.
Revocation will hurt legitimate credit counseling agencies by giving an immediate unfair advantage to the CCAs that have abused their non-profit status and disregarded their educational mission. The organizational and operative decisions of these agencies have been geared to maximizing profit. These are the agencies that have caught the attention of the IRS, the FTC, the Congress, and other regulators. Yet in the for-profit world of credit counseling that IRS revocation would mandate, the practices of these very agencies would necessarily become the industry standard for any agencies that remain.
Moreover, many of these very agencies are already largely structured to operate as for-profit businesses, while legitimate CCAs may find it difficult or impossible to complete a successful transition of their operations and assets from a non-profit to a for-profit structure while meeting all state laws applicable to the winding up of a non-profit organization.
There has been no indication that IRS has made provision for such transitions, or for working with all the state regulatory entities to coordinate such transitions. Most legitimate CCAs will simply not survive the cost and service interruption occasioned by such a transition.
In a for-profit world, a CCA which commits time and resources to public education cannot compete with a CCA which does not. Public education will have to be abandoned. In a for-profit world, sign up fees will not be limited by regulation or by concern over the consumer’s welfare, but instead will only be limited by “what the market will bear”. In a market where the consumer base is financially distressed, “what the market will bear” typically equates with predatory practices; consider, for example, “what the market will bear” in payday lending rates.
Revocation will hurt vulnerable consumers. There is currently no “consumer-friendly” alternative to non-profit credit counseling agencies. Consumers in financial distress will be left to collection agents, payday lenders, predatory home equity lenders, litigation, and bankruptcy. Consumers currently enrolled in debt management plans with legitimate CCAs may find themselves without a plan if revocation ends or seriously disrupts the CCA’s operations.
Further, revocation of the tax exempt non-profit status of credit counseling organizations would create an immediate dilemma for the hundreds of thousands of American families who are currently enrolled in debt management programs and who reside in States that require non-profit and/or 501(c)(3) tax exempt status as a condition of the licensing or legal [9]operation of a credit counseling agency.
Revocation will hurt the American economy. Bankruptcy filings will certainly double. The most recent versions of Congressional bankruptcy reform legislation contemplate that non-profit credit counselors will play a role in stemming the tide of bankruptcy filings. IRS revocation would be contrary to the expressed intent of Congress and will mean that non-profit credit counselors are not available to fill this important role. The social costs associated with financial distress will increase: broken families and loss of employment productivity are simply two examples of these social costs.
Without non-profit credit counseling, more Americans will turn to the high-risk option of taking out home equity loans to pay off high credit card debt. This practice is already a significant problem, and is only going to grow because a large number of these loans are adjustable-rate loans destined to increase as interest rates climb. Thus, in addition to bankruptcies, revocation of credit counseling’s 501(c)(3) status will increase the number of home foreclosures. Home ownership is recognized as a powerful stabilizing force in the American consumer economy, and any measure that increases home foreclosures is perilous.
Finally, the costs of revocation detailed above will impact on all aspects of the American economy. As financially distressed consumers file for bankruptcy in increased numbers, the cost of credit will increase for all consumers, including those who use credit responsibly. As those costs increase, the consumer spending decisions of all Americans will be impacted. While non-profit consumer counseling assists the percentage of Americans who suffer ill consequences associated with a ready stream of available consumer credit, all Americans will suffer if increased costs turn that stream into a trickle.
Recommendations
1. AADMO recommends that the Internal Revenue Service complete its comprehensive review of the credit counseling industry, properly sanction those who have abused the 501(c)(3) status conferred upon them by the IRS and provide the industry with immediate and ongoing guidance relative to the application of the tax code to the credit counseling process.
2. AADMO encourages the IRS to treat credit counseling organizations fairly when making recommendations to Congress vis-a-vis the future look and feel of the credit counseling process. Legitimately operating credit counseling organizations are well aware that there are bad players in their midst. Unfortunately, these players have operated freely for far too long; long enough to seriously eclipse long established, well-intentioned and legitimate organizations through their negative actions. The tax laws and the rules and regulations necessary to properly supervise and control the non-profit segment of our economy, including non-profit credit counseling organizations, are already in place. All that is needed now is regular review, consistent guidance and fair enforcement of existing federal and state codes by the regulatory sector.
3. Enlightened legislative interaction is also needed. AADMO recommends and supports the passage of a uniform, pre-emptive federal statute to replace the myriad of conflicting state laws now in use to regulate credit counseling and debt management service providers. We respectfully suggest that model credit counseling and debt management agencies should be involved in the legislative drafting process and that credit counselors should be regulated through statutes developed solely for the credit counseling and debt management process.
4. Credit counseling and debt management are unique services as compared to debt collection and debt settlement. A single, pre-emptive federal credit counseling statute will create an even playing field for service providers and guarantee consumers equal access to quality products and services regardless of their state of residence.
5. AADMO encourages the legislative and regulatory community to allow time for recent increases in state and federal oversight activities, media scrutiny and IRS actions to have their impact on the credit counseling process. We recommend that those charged with oversight responsibility study the impact of recent actions taken by regulators against CCAs, determined to be abusing their 501(c)(3) status, on the consumers enrolled in the DMP programs of said providers. A cooling off period is needed to assess impacts of actions already taken and to guarantee millions of American households that they will not be thrust into deeper financial chaos as a result of hastily enacted and ill-advised regulatory schemes.
[1] http://www.uscourts.gov/Press_Releases/fy04bk.pdf
[2] http://www.uscourts.gov/Press_Releases/603b.pdf
[3] According to the Executive Office for U.S. Trustees, “The credit counseling industry handles approximately $6 billion annually, more than the amount distributed from chapter 7 and chapter 13 bankruptcy cases combined.”
[4] http://www.federalreserve.gov/releases/g19/hist/cc_hist_mh.html
[5] For example, see Alaska and Colorado
[6] The New York State Banking Department announced in December 2004 to allocate all of the Department’s operating expenses to its regulated entities – such as “budget planners” (i.e. non-profit credit counseling).
[7] http://www.csus.edu/indiv/a/andersenj/Research/FinancialProblems.pdf
Substantial research has concluded that financial problems are stressors that affect marital quality and satisfaction.
[8] For example, see California and Virginia
[9] For example, see Kentucky, Maine, Oregon and Rhode Island