Bankruptcy credit counseling gets mixed reviews
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The term "brick-and-mortar services" describes companies that have a physical presence and offer face-to-face experiences as opposed to just the Internet and telephone.

Ensuring proper counseling
Limprecht says the agencies are approved only after extensive review.

"Staff at the Executive Office for U.S. Trustees, as well as in the field offices, review the applicant's materials for sufficiency and completeness, seeking additional information from the applicant if there are questions or deficiencies," says Limprecht. She says, as of early February, 25 applications for approval as a credit counseling agency had been denied.

In addition, the Internal Revenue Service is also keeping watch. Nonprofit credit counseling organizations have been under review by the IRS over the past couple of years.

"The IRS, because it administers the tax-exempt status of these organizations, and the Federal Trade Commission, because it oversees consumer issues, announced a joint effort in 2003 to take a hard look at the tax-exempt agencies," says IRS spokeswoman Nancy Mathis. "Both federal agencies had received numerous consumer complaints."

A provision in the tax code passed by Congress allows credit counseling agencies to be exempt from paying income taxes if they provide charitable or educational programs to their clients, such as an educational program for low-income people in debt.

Mathis also points out that over the past decade, consumer debt exploded and tax-exempt credit counseling agencies increased.

"Instead of providing charitable or educational programs, some credit counseling agencies used high-pressure tactics to obtain exorbitant fees from their clients and shuffled them off to ineffective debt-management programs," she says. "There were also issues of the top executives at these supposedly charitable organizations receiving extremely high salaries."

The IRS began looking at approximately 60 credit counseling agencies.

"At the end of last year, the IRS concluded it should revoke the tax-exempt status of about 30 agencies," Mathis says. "These 30 represent about half of the industry's revenue."

Credit counseling agencies have the right to appeal the revocation through the internal IRS Appeals Office.