Here are the facts about credit counseling:
The IRS has recognized approximately 900+ organizations as non profit credit counseling agencies. As recently as 2004, more than 2500 agencies "claimed" to be non profit credit counseling agencies. There is a clear discrepency.
The IRS conducted an audit of the 75 largest non profit credit counseling agencies and REVOKED the non profit status of ALL of them. These 75 agencies represent 40% of the debt managment plans arranged in the United States.
The IRS has issued industry audit questionaires or audits of the remaining recognized non profit credit conseling agencies.
The IRS has ruled that those agencies which engage in distributions of creditors for fees, either to the consumer or from the creditor, are engaging in an IMPERMISSIBLE conduct of acitivity for the benefit of a for profit concern.
Interpretation: if the credit counseling agency makes any money by collecting consumer payments and distributing it to creditors, they WILL have their non profit status revoked.
Problem: At least 42 states REQUIRE that any agency that collects and distributes payments to creditors to be either a non profit, or an attorney pursuant to the licensed practice of law.
Further Problem: Almost every non profit credit counseling agency that operates in one of those 42 states is in violation of the non profit rules if they get ANY money for the
dmp. As a practical concern, they cannot operate without getting enough money to cover the costs of doing the business. They cannot comply with both the State and the Federal law.
In my travels and talks with various States' Attorneys General, the States' solution is to ammend their laws to allow licensed for profit credit counseling. In the meantime, the industry is in an incredible state of flux.
Many agencies are indeed reputable. Please look for those that comply with industry standards (ISO 9000 certification, Counselor certification, certification by the US Bankruptcy Trustees) and/or are licensed in your state to perform credit counseling. When I place a consumer with an agency, I make sure that they are compliant BEFORE I place them.