To be in the credit counseling business you have to be a nonprofit.  Credit card companies will frequently refuse to set up repayment plans with for-profit debt counselors.  Mandatory bankruptcy credit counseling courses may only be sponsored by nonprofits.  And the common perception is that “real” credit counselors should be nonprofit agencies.

There are historical reasons for these perceptions.  At one time credit counseling was sponsored by donations from banks and community grants.  Small community agencies offered face-to-face counseling that went beyond the financial issues as counselors delved into the personal issues that caused financial distress.  Counselors acted as social workers who taught basic budgeting concepts and sought to redeem the wayward debtor.

Jane McNamara, GreenPath CEO.  Earned $590,883 in 2010
Jane McNamara, GreenPath CEO. Earned $590,883 in 2010

The reality of today’s credit counseling industry are much different.  Personal credit counseling is a thing of the past.

Oh sure, they still go through the motions.  A budget worksheet may be prepared and handouts about saving money, cutting coupons, establishing savings accounts, etc, are shared, but that is just the window dressing.  No real face-to-face counseling occurs.

In fact, the majority of people who are in Debt Management Plans (DMP) have never met their credit counselor in person.   The “counseling” they receive is a 30 minute phone call or an online chat.

Credit counseling agencies are primarily funded by enrolling clients into Debt Management Plans.  They charge clients a flat dollar amount each month to manage the plan (typically $25 to $50 per month) and they also keep a percentage of the amounts paid through the plan, what the industry calls Fair Share.  The more clients enrolled in the payment plan the higher the income of the agency.  It is not uncommon for credit counselors to be paid bonuses based on the number of DPMs they sell.

Ivan Hand, CEO of Money Management International
Ivan Hand, CEO of Money Management International. Earned $889,870 in 2010

Managing a credit counseling agency turns out to be a very profitable occupation.  According to a report published by professor Robert D. Manning, in 2010 the CEO of Money Management International, Ivan Hand, earned a hefty $889,870 while GreenPath Debt Solutions‘ CEO, Jane McNamara, earned $590,883.  The average income of the CEOs of the top 10 credit counseling agencies in 2010 was $456,116.

Over the past 30 years a real change has taken place in the credit counseling industry.  Newer credit counseling agencies have entered the market with a business model based on setting up a conglomerate of for-profit companies that connect to the nonprofit agency.  The basic idea is that they sign up new clients in the nonprofit company and then farm out the work to a network of for-profit affiliates.  The services are advertised as being offered by a nonprofit, so it is difficult for consumers to figure out the real nonprofits from the phony nonprofits.

Congressional hearings on this new trend in credit counseling were conducted in 2004.  (See Profiteering in a Non-Profit Industry; Abusive Practices in credit Counseling.) Despite the attention the industry received and despite an IRS crackdown that stripped nonprofit tax status to several agencies, the trend has continued and intensified.  The agencies lawyered up and fought back, and it appears that the IRS has basically surrendered the issue except in the worst cases.  Many agencies continue to operate as “telemarketing sweatshops” that are designed to set up payment plans while providing little to no financial education.

To make matters worse, debt settlement companies also incorporate themselves as nonprofit debt counselors.  These agencies are very appealing to customers since the monthly payment in these programs are often half the cost of a traditional debt management plan.  The problem is, consumers fail to understand that true nature of these agencies and that no payment is made to their creditors until a debt is settled.  Our firm routinely meets clients enrolled in these debt settlement programs who are being sued because the creditor refused the offered settlement or, more likely, no settlement was even offered because not enough money was saved up in the settlement escrow account.  Consumers are confused since everyone is calling themselves a nonprofit and they are unable to distinguish the true nature of the agency.

What the credit counseling industry lacks is a system of independent audits conducted by outside accounting firms, something similar to what publicly traded companies provide.  Search as I have, there is not a single independent and trustworthy source of information comparing the effectiveness and cost of competing credit counseling agencies.  The only bright light in this industry is the Transparency Report provided by Cambridge Credit Counseling.  To my knowledge, Cambridge is the only agency that publicly publishes information on the success rate of their programs.

An industry that refuses to be accountable cannot be trusted.  It is time for credit counselors to submit to public audits and to be measured and compared by a uniform set of standards.