- Some counseling agency officials are among the nation's highest paid non-profit executives.
- For-profit and non-profit credit counseling firms split the market today.
How a Credit Counseling Firm Can Help You is Far More Important than the Firm's Tax Status.
Credit counseling programs are a popular choice for Americans trying to resolve debt problems. Most consumers do not know a lot about credit counseling programs, so they have a hard time deciding if credit counseling is the right process to address their debt problems. Even if they decide to work with a credit counseling program, finding the right one is not easy. One factor consumers weigh is whether a consumer credit counseling service (CCCS) is a non-profit or for-profit business.
Whether a credit counseling service is non-profit or for-profit does not indicate if the firm offers effective services or good value for the dollar. You might think non-profit means the firm works solely in the public interest, like a church or public broadcasting, but that is not true. Non-profit indicates the tax status of a firm in the eyes of the IRS and state tax authorities. Non-profit credit counseling firms charge consumers fees for enrolling in the program as well as monthly maintenance fees, which is exactly the same as for-profit firms.
Non-profit Credit Counseling Firm’s Top Exec Compensation Exceeds $900,000
You may be surprised to learn how much the CEOs of non-profit credit counseling firms earn, and it may not be consistent with your perception of non-profits. According to Non-profit credit advisers cash in; CEOs earn big as consumers struggle by Harvy Lipman, which cites the non-profit credit counseling firms’ 2009 federal tax returns as the source of the information, the top total yearly compensation for a CEO of a non-profit credit counseling firm was more than $918,000. “Some counseling agency officials are among the nation’s highest paid non-profit executives,” Lipman wrote.
Because credit counseling firms collect fees from clients and contributions from creditors, it is safe to assume the source of these large salaries coming out of clients' pockets. Non-profit status clearly does not stop such credit counseling firms from paying lavish salaries to top executives.
IRS Investigation
The IRS conducted a thorough investigation of non-profit credit counseling firms in 2006. The 2006 IRS investigation Credit Counseling Compliance Project found that many credit counselors claimed IRS tax-exempt status while bringing in large profits, using various means to disguise those profits, and providing executives with excessive compensation when compared with the pay at other, comparably sized, non-profit organizations. As a result of its investigation, the IRS revoked many credit counselors' tax-exempt non-profit status, including many of the country's largest credit counseling providers. Each year the IRS revokes the status of non-profits that it determines should no longer be entitled to claim non-profit status.
In the most recent IRS update on non-profits, Recent Revocations of 501(c)(3) Determinations - Latest Additions and Table of Links, from May, 2011, the IRS revoked the non-profit status of six non-profit credit counseling firms. These actions by the IRS benefited consumers and the credit counseling industry by allowing more traditional CCCS programs to prosper, while forcing less scrupulous providers, such as AmeriDebt, out of business entirely. For-profit and non-profit credit counseling firms split the credit counseling market today.
Summary
Avoid assigning more importance to a credit counseling firm’s non-profit or for-profit status than it merits. Just because a credit counseling firm complies with the IRS definition of a non-profit does not mean the firm works harder for you or acts solely in your interest. Focus on what the specific credit counseling firms you consider can do for you, what they charge, and how they compare to competitors, whether non-profit or for-profit. The bottom line is how a credit counseling firm can help you, which is far more important than the firm's tax status.
VIDEO: Credit Counseling - What is Credit Counseling?
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