Credit Counseling Agencies- Is Non-Profit Status Strictly Marketing Hype?

Written by Mike Killian
Posted On: October 3, 2005

The recent CardRatings.com article Think Twice Before You Leap led me to question differences between a non-profit (NP) and for-profit (FP) credit-counseling agency.   I discovered the only major legal differences seem to be the need for non-profit status (tax-exempt 501-C3) and procedural flexibility.   Real differences seem to exist in the area of myth or “use to be” thinking.

A telephone contact at Money Management International stated “the biggest difference was in tax exemption status” but went on to suggest services were basically the same.    A representative at Action Credit Advisors Foundation said, “The basic difference was that non-profit offered educational services such as debt counseling and budgeting.”

Nonprofits Are Often Motivated by Profit

There are many legitimate NP groups.nbsp  However, caution must be used not to use a 501-C3 status alone as the basis of selection!

I have learned over the years that many holders of the 501-C3 are today about as non-profit as Donald Trump because there is minimal follow-up on the day-to-day operation of any counseling agency.    As a result many NP firms use their status as nothing more than a promotional shingle to say "Use me since I will cost you less."    This can be very far from the truth.    In fact an unofficial IRS statement was reported while writing this article, “there is nothing ‘non-profit’ about debt management.”

Leveling the Playing Field

In years gone by, NP status entitled an agency a “fair-share” distribution from the credit card company of monies paid by the client-consumer to reduce the credit card debt.    This practice was by and large eliminated years ago when all the major players in the credit card industry got together and determined a payback plan.

Today ANY debt counselor must follow this exact same formula when setting up a debt repayment plan. There is absolutely no mystery about what the payment will be.    In fact, anyone can view each creditor's formula.

This should also dispel the myth that there can be any difference from what one agency can offer in a bonafide debt management program over another.   The creditor sets the rates... not the counseling agency.

Chief Difference Between For-Profits and Non-Profits

The chief difference seems to be flexibility and client history. I interviewed FP agency Accelerated Debt Consolidation who referenced an 84% retention rate and one complaint with the Better Business Bureau (BBB) in 4 years.    I followed up with BBB and was told in this industry that a history of 7 complaints per year was favorable.

Jim Young, CEO of Accelerated said:

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It is not so much a matter of for-profit VS non profit as it is a matter of WHO is handling the accounts. Since you will get terms exactly the same whether you use a for-profit or a non-profit [see Creditor’s Formula above], there are more important issues involved.   For example, what is the firm’s retention rate?  &nbspHow; many clients have they brought in and how many are still with them?   Do they disburse payments daily?   Will they allow you to keep credit cards out of the program?”

Another question is follow-through.    Thousands of debt management proposals hit a creditors desk daily. Historically 1/3 are lost and must be resubmitted.  &nbspWe; never allow time delay when submitting a proposal.

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Mr. Young added,

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Again the for-profit VS non-profit is meaningless.  &nbspIf; you owe Chase $10,000 your monthly payment will be $200 and you will get 7% no matter which [agency] one you use.

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