Exploiting Non-Profit Debt Relief Status

As elucidated by the National Consumer Law Center, the first way that non-profit debt relief companies abused their position as a 501(c)(3) organization has to do with their ties to for-profit businesses or the extent to which the directors benefits monetarily from the organization. As mandated by the IRS, the net earnings of a 501(c)(3) entity should not be used to benefit any individuals associated with the non-profit organization including directors, officers or members. The main culprit of this abuse, as widely publicized online and in the news in the past, was Ameridebt.

The main fashion in which Ameridebt and other debt relief organizations violated their obligations as non-profit entities was by being primarily profit-driven, whose main purpose was to line the pockets of the organization’s directors. Recent studies showed that some of the directors of the “non-profit” debt relief companies were earning as much as $400,000 annually. Besides charging steep fees that were dictated by “what the market would pay” instead of “what the market should pay”, some of these non-profit agencies would create close alliances with for-profit ventures like mortgage corporations, credit repair businesses, or other companies that were interested in providing services to consumers with credit problems. In turn, the debt relief companies were receiving kick-backs for providing the consumers’ personal information.

Another common way that these debt relief companies circumvented federal tax-exemption laws was by channeling their profits into other businesses. In the case of Ameridebt, all the client servicing was funneled into a for-profit venture known as DebtWorks. In other cases, non-profit credit counseling agencies would hire for-profit telemarketers to sign up and enroll consumers, presumably while charging a high set up fee and marketing their product as a “charity.”