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IRS cracks down on sham credit counseling agencies

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Good times or bad, millions of American households find themselves in financial binds. And when they reach out for help, they should be able to find credit counseling services that are legitimate and ethical.

However, according to the Internal Revenue Service, an unacceptable number of these agencies that call themselves nonprofit operations are not only adding to the financial woes of people in trouble, but also stealing the little money they still have.

The IRS has spent the last two years auditing 63 credit counseling agencies, representing more than half of the revenue in the industry. The service says that 41 completed audits have resulted in "revocation, proposed revocation or other termination of tax-exempt status."

"Over a period of years, tax-exempt credit counseling became a big business dominated by bad actors," said IRS Commissioner Mark Everson. "Our examination substantiated that these organizations have not been operating for the public good and don't deserve tax-exempt status. They have poisoned an entire sector of the charitable community."

The IRS says the counseling services that have had their tax-exempt status revoked failed to provide the level of public benefit required to qualify for tax exemption. The IRS statement said, "Many of these agencies offered little or no counseling or education and appeared to be primarily motivated by profit. In many instances, these agencies also served the private interest of related for-profit businesses, officers and directors."

The ethics of the credit counseling industry have long been suspect. One problem has been the web of federal, state and local regulators that approach the situation for a number of different directions.

The Federal Trade Commission earlier this year brought an end to a multiyear campaign to shut down AmeriDebt, a debt management operation that allegedly deceived consumers -- many here in San Diego and Southern California -- into paying at least $170 million in hidden fees.

"Our case alleges that these defendants used their credit counseling business to deceive nearly 300,000 consumers about the services they provide, the fees they charged and their status as a nonprofit company," said Lydie Parnes, director of the FTC's Bureau of Consumer Protection.

"This settlement bans the defendants from the credit counseling business permanently and requires them to give up the money they made from this scheme."

AmeriDebt filed for bankruptcy in June 2004, but the FTC continued to focus its attention on the company founder, Andris Pukke. Earlier this year Pukke reached an agreement that required he give up virtually all of his assets for a consumer redress program for victims of the deception.

The FTC estimates that it will recover about $35 million, slightly more than 10 percent of the estimated damages suffered by AmeriDebt victims.

One of those victims, Jolanta Troy, testified before a Congressional Committee in 2004 about her troubles after signing up with the agency. After a divorce, she found herself mired with $30,000 in credit card debt. "So I called AmeriDebt and spoke with a counselor. I told her about my situation and she said AmeriDebt could help me by negotiating with my creditors to reduce my payments and interest rates," Troy said.

"This counselor also said that AmeriDebt was a nonprofit organization -- like a charity -- and that I needed their help. She was very pushy and almost degrading. She made me feel embarrassed and ashamed, but I eventually decided to go on her program," Troy told the committee.

She was told to send a money order for $783 and they would start a payment program as soon as possible. Very soon she started getting calls directly from the credit card companies wondering why she was not making her payments.

Her efforts to get help from AmeriDebt were futile. Ultimately, "Customer service told me that AmeriDebt kept the money as a voluntary contribution. I knew that I agreed to a monthly charge, but I knew nothing about them keeping my first payment as a voluntary contribution."

Troy ultimately turned to the Better Business Bureau for help but was never able to get her money refunded. The BBB keeps active files on credit counseling agencies, and consumers are advised to check with the bureau before making any decisions.

"I'm here today so that no other person has to go through what I did," Troy said. "Something must be done to stop companies like AmeriDebt that are making money off of good people who are just trying to do the right thing."

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