New Tax Law Establishes Additional Standards and Requirements for Credit Counseling Agencies

3 min

On August 17, 2006, President Bush signed H.R. 4, the Pension Protection Act of 2006 (the “Act”), into law. [1]  The following summary highlights some of the key provisions pertaining to credit counseling agencies.

The bill establishes additional standards and requirements for credit counseling agencies to qualify for recognition of federal tax-exempt status under Internal Revenue Code Sections 501(c)(3) and 501(c)(4), with the tighter standards reserved for Section 501(c)(3) organizations.  These standards are in addition to existing tax exemption requirements. 

Debt Management Plans can be an “Integral Part” of Counseling and Education

Importantly, the new bill effectively codifies into law the principle that a debt management plan can – depending on how the agency operates its debt management program – be an “integral part” of a tax-exempt 501(c)(3) organization's counseling and educational purposes, presuming that the provision of counseling and education is a “substantial purpose” of the organization.  The new provisions contain no debt management plan revenue limit.  Instead, it contains a phased-in limit on fair share revenue, ending up with a 50 percent cap on fair share (as a percentage of total revenue) in 2011. 

Restrictions on Credit Counseling Agencies

The bill also contains a number of other important restrictions on would-be tax-exempt credit counseling agencies, including but not limited to the areas of compensated referrals (including a complete ban on paying for the referral of consumers to the credit counseling agency)(note that the legislative history makes clear that “referral” lines like those operated by NFCC and AICCCA are not intended to be covered by this ban), voluntary contributions, ownership of affiliated business, credit repair services (except as part of credit counseling services), DMP fee structure, waiving fees in hardship cases, making loans to consumers, and board of director composition. 

Note that these other requirements would apply to both 501(c)(3) and 501(c)(4) organizations, while the fair share limitation, the counseling and education as a “substantial purpose” requirement, and the ban on soliciting voluntary contributions from clients (but with no ban on mandatory fees) would only apply to 501(c)(3) organizations. 

Addition to Existing Tax-Exemption Requirements

The bill's legislative history makes clear that these new requirements are intended to be in addition to the existing tax exemption requirements that the IRS has been enforcing, and that satisfying the new requirements does not, in and of itself, help to ensure tax-exempt status for a credit counseling agency. 

Effective Date

For existing 501(c)(3) credit counseling agencies, the law would take effect and be applicable for tax years that begin after one year from the date of enactment of this bill; for others, it would take effect and be applicable for tax years that begin after enactment of the bill.

The provisions described above are brief summaries of at-times complex provisions of the new law. 

*  *  *  *  *  *

For more information, contact George Constantine or Jonathan Pompan at 202/344-4000, or at or

This article is not intended to provide legal advice or opinion and should not be relied on as such. Legal advice can only be provided in response to specific fact situations.

[1] Public Law No: 109-280 § 1220.