DEBT MANAGEMENT PLANS TAKE DIRECT HIT IN TAX BILL

November 17, 2005

Return To Archives

The Senate’s version of the tax reconciliation bill, now working its way through the Senate, takes direct aim at the large national credit counseling organizations that primarily use “debt management plans” (DMPs) as a means to conduct credit counseling. The new provision, if it survives the legislative process, would limit DMP services to 25 percent of the organization’s total activities, if the entity is to qualify for nonprofit status under §501(c)(3) of the Internal Revenue Code.

Moreover, the law would require DMP services to be treated as unrelated business income subject to taxation. The Senate provision, tucked away in the “reconciliation” bill, is authored by Sen. Chuck Grassley (R-Iowa), chairman of the Senate Finance Committee and also the chief sponsor of the recently enacted bankruptcy law (BAPCPA). Under the new bankruptcy law, all consumer debtors must go through credit counseling within 180 days of filing and receive a certificate from an approved nonprofit budget and credit counselor. The impact would be felt most directly by such entities as Springboard Credit Counseling, Money Management International and GreenPath, all of which rely on DMPs as a major part of their business model.

Debt Management Plans Take Direct Hit in Tax Bill