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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
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