CONSUMER GROUP WARNS OF BANKRUPTCY EXPLOSION IF STATES, CONGRESS DON’T CHANGE CREDIT COUNSELING LAWS

September 1, 2004

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A national consumer advocacy group, Consumers for Responsible Credit Solutions (CRCS), warned in a press release that there could be a dramatic explosion in the numbers of bankruptcies filed in the near future unless most states or Congress act soon to change the laws regulating the credit counseling industry.

Without access to the services provided by the nation’s credit counseling agencies, hundreds of thousands of consumers would have little choice but to declare bankruptcy and already rising bankruptcy rates would explode dramatically, said CRCS in the press release. But access to those services may not be available in the majority of states in the future unless laws are changed. Currently, a majority of states have laws that either outright ban individuals or taxpaying businesses from providing credit counseling services, or otherwise in practice restrict credit counseling services exclusively to tax-exempt organizations.

The practice of creditor funding and control of credit counseling agencies has been criticized for decades, most recently in an 80-page report published by CRCS, which argues that creditor-controlled agencies typically serve the interests of creditors and their profits more than consumers.

The report also points out that tax-exempt agencies are, by law, not only exempt from paying taxes, but are also exempt from basic state and federal oversight and regulation as well. Now, a recently released internal Internal Revenue Service (IRS) memo indicates the IRS is preparing a case for revoking the tax-exempt status of large numbers of credit counseling agencies, including traditionally creditor-funded agencies that serve primarily as debt collectors for creditors. Should the IRS revoke the tax-exempt status of credit counseling agencies that serve primarily as debt collectors for creditors, one or two things would have to happen: One, agencies would have to divorce themselves from creditors and creditor funding. Or two, they would have to operate as taxpaying businesses. CRCS Executive Director Darrell McKigney said “unless current laws are changed, such an IRS ruling could create a bankruptcy explosion. Right now, a majority of states effectively prohibit taxpaying financial services providers from helping consumers with credit counseling services.

In addition, to maintain their control over the industry, many of the nation’s largest creditors refuse to support independent, taxpaying agencies. As a result, in many states there are virtually no taxpaying credit counseling agencies in existence for consumers to turn to at this time.”