Credit counseling as a "negotiation"

One of the arguments enemies of credit counseling make is that the credit counselors don't really negotiate concessions with the creditors on behalf of their clients. "The terms are dictated by the credit card companies" goes the argument. (This anti-credit counseling slur is included on Wikipedia, for instance.)

It's complicated, but I think this is a false argument. No, credit counselors don't really "negotiate" each debt with the creditors, and the NFCC is useless when it comes to negotiating industry-wide concessions with creditors. But to say the terms are "dictated by the creditors" gets it wrong, I think.

I'd argue it's the market that dictates those terms. The creditors can play hardball if they want, and some individual creditors do, when it comes to concessions they offer to credit counseling clients who enroll in debt management plans. But if they're too tough, they force the client into a corner where the only alternative is bankruptcy. And legit credit counselors will recommend bankruptcy if that's the best option for the client. This is especially true since the credit counselors provide pre-bankruptcy counseling and education by law. Bankruptcy attorneys who hate credit counseling miss the point of all this; in fact having credit counselors as bk counseling providers makes their negotiating position much stronger, so the client is more likely to benefit with better terms when s/he agrees to a DMP.

Of course, a creditor offering good concessions to help a debtor avoid bankruptcy isn't a good thing for bankruptcy attorneys, so they're free to go on hating the whole concept of counseling. But they can't really say it's the debtor's interests they're trying to protect, but rather their own.

Comments

[Mark Guimond]

In a previous e-mail you were advised that the IRS began its Credit Counseling Initiative by examining 63 large credit counseling organizations The IRS then turned its attention to the rest of the credit counseling industry. It selected 111 organizations for examination in FY 2007 and another 80 for examination in FY 2008. The number of credit counseling audits (63+111+80) will be 254.

For those of you who enjoyed Mark's presentation in Austin (based solely on Kallie's extensive research) on the significance of the number 143 with the previously announced audits, you may understand the number 254 even more.

Our review of all Form 990 filings for the credit counseling industry yielded a total of 557 actual credit counseling organizations. Of those 557 organizations, there were 290 that had no income (which we took to mean no business operation in that tax year).

Taking the 290 with zero income from the field of 557 total organizations leaves 267 agencies with income of $1 or more. Remember that there were some 13 small agency/debt scam revocations that occurred during the initial phase of the credit counseling investigation and were not part of the original 63 large organization audits.

If we remove these 13 revocations from the pool of 267 agencies with income of $1 or more, we have...254. It might be just a coincidence or maybe not...

[Jeff Michael]

Hi Mark, your comments are always welcome here.

It looks like the entire credit-counseling industry is under IRS investigation. I've gathered that there's been a sea change at the IRS with regard to credit counseling, and my sense is that someone there doesn't consider credit counseling & education to be a legitimate charitable purpose.

It's easy to see why someone would have that view if they thought credit counselors were just another kind of collection agency. I really don't think that's an accurate description of credit counseling, so I don't share the view that credit counseling isn't a legit charitable activity.

The question is, do you? What's AADMO's position on this? Do you think the industry should be for-profit only, with no 501(c)3's allowed? I'm sorry I've never heard you speak on this in person, which is why I'm curious whether you have an official position on this.

I do think the non-profits need to pay close attention to the IRS investigations and revocations, so they should take your research seriously and make sure their practices are truly non-profit. Is that what you're advising? Or do you think the IRS will inevitably shut down the entire non-profit industry?

[Chad]

The one thing that I never liked about credit counseling services, is although you are contacting them to correct your debt, your credit scores still plummeted once the credit bureaus caught wind of your participation with a ccs. I don't know if that is still the case or not, but if so it would definately be a deterrent for those who are debating it or considering bankruptcy.

[Jeff Michael]

That's not exactly true, Chad. You scores don't change at all; the credit bureaus are neutral toward credit counseling.

The only negative effect counseling might have on one's "credit" is if certain lenders look negatively on it and offer you worse terms. This does happen, but it's not your score that plummets, and it isn't the bureaus who make the call.

Personally, I think lenders who look at credit counseling as a negative are wrong to do so; they're either ignorant or greedy or both. (I say greedy because some lenders would rather lend to you fresh from bankruptcy rather than fresh off of a Debt management plan. Why? Because they can charge the recently bankrupt MUCH higher interest and fees, and they know you can only declare bankruptcy every 7-8 years.)