U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

1 

" ! SENATE 109th Congress 

1st Session 

S. REPT. 

2005

109–55 

PROFITEERING IN A NON-PROFIT INDUSTRY: 

ABUSIVE PRACTICES IN CREDIT 

COUNSELING 

R E P O R T 

PREPARED BY THE

PERMANENT SUBCOMMITTEE ON 

INVESTIGATIONS 

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

APRIL 13, 2005 


congress.#13
(II) 

COMMITTEE ON GOVERNMENTAL AFFAIRS 

SUSAN M. COLLINS, Maine, Chairman 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

NORM COLEMAN, Minnesota 

ARLEN SPECTER, Pennsylvania 

TOM COBURN, Oklahoma 

LINCOLN D. CHAFEE, Rhode Island 

ROBERT F. BENNETT, Utah 

PETE V. DOMENICI, New Mexico 

JOHN W. WARNER, Virginia 

JOSEPH I. LIEBERMAN, Connecticut 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas 

MICHAEL D. BOPP, Staff Director and Chief Counsel 

JOYCE A. RECHTSCHAFFEN, Minority Staff Director and Counsel 

AMY B. NEWHOUSE, Chief Clerk 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

NORM COLEMAN, Minnesota, Chairman 

TED STEVENS, Alaska 

TOM COBURN, Oklahoma 

LINCOLN D. CHAFEE, Rhode Island 

ROBERT F. BENNETT, Utah 

PETE V. DOMENICI, New Mexico 

JOHN W. WARNER, Virginia 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas 

RAYMOND V. SHEPHERD, III, Staff Director and Chief Counsel 

KATHERINE E. ENGLISH, Counsel 

STEVEN A. GROVES, Counsel 

ELISE J. BEAN, Minority Staff Director and Chief Counsel 

LAURA E. STUBER, Minority Counsel 

MARY D. ROBERTSON, Chief Clerk 

(III) 

C O N T E N T S 

Page 

I. INTRODUCTION ............................................................................................... 1 

II. EXECUTIVE SUMMARY ................................................................................ 2 

III. OVERVIEW OF THE CREDIT COUNSELING INDUSTRY .................. 4 

A. History of the Credit Counseling Industry ................................................ 4 

B. Current Law Governing the Credit Counseling Industry ........................ 5 

IV. DEBTWORKS, AMERIX, AND CAMBRIDGE: THREE CASE 

STUDIES ........................................................................................................ 9 

A. DebtWorks and The Ballenger Group Conglomerate ............................... 10 

(1) Formation of DebtWorks and The Ballenger Group Conglomerate . 10 

(2) Control of the Affiliated Credit Counseling Agencies ......................... 13 

(3) Private Benefits to the For-Profit Corporations ................................. 14 

(4) Harm to Consumers .............................................................................. 15 

B. The Ascend One-Amerix Conglomerate ..................................................... 18 

(1) Formation of the Ascend One-Amerix Conglomerate ......................... 18 

(2) Control of the Affiliated Credit Counseling Agencies ......................... 20 

(3) Private Benefits to the For-Profit Corporations ................................. 20 

(4) Harm to Consumers .............................................................................. 22 

C. The Cambridge-Brighton Conglomerate .................................................... 23 

(1) Formation of the Cambridge-Brighton Conglomerate ........................ 24 

(2) Control of the Affiliated Credit Counseling Agencies ......................... 25 

(3) Private Benefits to the For-Profit Corporations ................................. 26 

(4) Harm to Consumers .............................................................................. 28 

V. REGULATION AND ENFORCEMENT ........................................................ 32 

A. Industry Self-Regulation ............................................................................. 32 

B. Creditor Standards ...................................................................................... 34 

(1) History of the Creditor-Credit Counseling Agency Relationship ....... 34 

(2) Three Creditor Models .......................................................................... 36 

(3) Using Fair Share Payment Standards to End Abuses ....................... 38 

C. State Regulation and Enforcement ............................................................ 40 

D. Federal Regulation and Enforcement ........................................................ 41 

(1) Internal Revenue Service ...................................................................... 41 

(2) The Federal Trade Commission ........................................................... 43 

(3) Pending Bankruptcy Legislation .......................................................... 44 

VI. POST HEARING CHANGES IN THE INDUSTRY .................................. 45 

A. DebtWorks and The Ballenger Group ........................................................ 46 

(1) AmeriDebt Files for Chapter 11 Reorganization ................................ 46 

(2) The Ballenger Group ............................................................................. 47 

B. The Ascend One-Amerix Conglomerate ..................................................... 49 

C. The Cambridge-Brighton Conglomerate .................................................... 51 

D. Recommendations ........................................................................................ 53 

(1) 

PROFITEERING IN A NON-PROFIT INDUSTRY: 

ABUSIVE PRACTICES IN CREDIT COUNSELING 

I. INTRODUCTION 

In September 2003, the U.S. Permanent Subcommittee on Investigations of the Committee on Governmental Affairs, began an investigation into the credit counseling industry. The investigation 

focused on new entrants into the industry, the marketing of debt 

management plans, the relationship between non-profit credit 

counseling agencies and for-profit service providers, and the quality 

of the counseling that clients received. The Subcommittee’s Majority Staff initiated the investigation at the direction of the Subcommittee’s Chairman, Senator Norm Coleman, with the concurrence and support of the Subcommittee Ranking Minority Member, 

Senator Carl Levin. The information in this report is based on the 

ensuing bipartisan investigation by the Subcommittee’s Majority 

and Minority staffs. 

Credit counseling agencies (‘‘CCAs’’) have traditionally been nonprofit companies that rely upon contributions from creditors and 

charities and small fees from consumers to cover the operating 

costs of providing advice, debt counseling, and debt management 

plans to consumers who have trouble paying their credit card bills. 

Some new entrants to the industry, however, have developed a 

completely different business model—a ‘‘for-profit model’’ designed 

so that their non-profit credit counseling agencies generate massive 

revenues for for-profit affiliates through advertising, marketing, executive salaries, and any number of other activities other than actual credit counseling. The new model looks to the consumer to provide those revenues. 

Many of the new non-profit and for-profit companies are organized and operated to generate profits from an otherwise non-profit 

industry. Evidence of the new entrants’ intention to create profits 

is indicated in several ways, including: (1) the manner in which the 

new entrant is organized, (2) the extent of control exercised by a 

for-profit entity over its non-profit CCA affiliate, and (3) the massive revenues funneled to the for-profit entity from the non-profit 

agency. 

When profit motive is injected into a non-profit industry, it 

should come as no surprise that harm to consumers will follow. Indeed, the primary effect of the for-profit model has been to corrupt 

the original purpose of the credit counseling industry—to provide 

advice, counseling, and education to indebted consumers free of 

charge or at minimal charge, and place consumers on debt management programs only if they are otherwise unable to pay their debts. 

Some of the new entrants now practice the reverse—they provide 

2 

1 Eileen Powell, ‘‘Consumer Debt More Than Doubles in Decade,’’ The Washington Times, January 6, 2004. 2 Id. 

3The American Bankruptcy Institute, available at www.abiworld.org. 

no bona fide education or counseling and place every consumer 

onto a debt management program at an unreasonable or exorbitant 

charge. 

II. EXECUTIVE SUMMARY 

Consumer debt has more than doubled in the past 10 years.1 The 

nation’s credit card debt is currently $735 billion.2 The rapid increase in credit card balances is one factor in the corresponding increase in personal bankruptcies. Since 1996, more than one million 

consumers have filed for bankruptcy each year, with a record 1.66 

million new filings in 2003.3 As Chairman Coleman stated in his 

opening statement at the hearing entitled Profiteering in a NonProfit Industry: Abusive Practices in Credit Counseling, March 24, 

2004, ‘‘The growth in both debt and bankruptcy demonstrates the 

need for much better financial education. Although the immediate 

cause of most bankruptcies is a sudden setback such as divorce, serious illness, or unemployment, the amount of debt these individuals carried when faced with this tragic event indicates their poor 

understanding of credit and finances.’’ 

The social need for better financial education is one of the primary reasons why credit counseling has long been recognized as a 

charitable and educational activity worthy of tax exempt status 

under Section 501(c)(3) of the U.S. tax code. For the past several 

decades, consumers in debt regularly turned to the non-profit credit 

counseling industry for advice and financial education. Consumers 

who could not afford to make all of their payments often enrolled 

in a debt management program, which allowed them to consolidate 

their debts from several credit cards, reduce their monthly payments, and lower their interest rates. 

Over the past several years, however, the credit counseling industry has undergone significant changes. The activities of some 

‘‘new entrants’’ have resulted in increasing consumer complaints 

about excessive fees, non-existent education, poor service, and generally being left in worse debt than when they initiated their debt 

management program. With this in mind, the Subcommittee initiated an investigation to determine the state of the credit counseling industry and whether solutions are available to remedy its 

problems. 

The Subcommittee’s investigation included a thorough examination of credit counseling agencies, their for-profit affiliates, major 

credit card issuers, Federal and state agencies and officials, consumer advocates, and their interrelated relationships. Additionally, 

current and former credit counselors and CCA clients were interviewed and Subcommittee staff responded to advertisements from 

various agencies to see what advice was being given. The Subcommittee held a hearing on March 24, 2004 in which the Subcommittee’s preliminary findings were disclosed and members of 

the industry testified. 

The hearing illustrated the new entrants’ model of credit counseling. High consumer fees and lucrative contracts that benefit the 

3 

related for-profit company characterize this model. The Subcommittee focused on three debt management conglomerates to illustrate the unfriendly consumer practices eviscerating the industry. These conglomerates were DebtWorks and The Ballenger 

Group, Ascend One-Amerix, and Cambridge-Brighton. The hearing 

consisted of four panels representing consumers, and former CCA 

employees, CCAs, their for-profit affiliates, and Federal regulators. 

The first panel included two victims of the new entrants’ predatory practices. Jolanta Troy testified about her experience with 

AmeriDebt, Inc. (‘‘AmeriDebt’’). AmeriDebt is a very large CCA 

with multiple class action suits pending against it with the Federal 

Trade Commission and the attorneys general of multiple states. 

The second witness was Raymond Schuck, a former client of Cambridge Credit Counseling (‘‘Cambridge’’), another large CCA with 

suits pending from the Attorneys General of Massachusetts and 

North Carolina. Two former employees of AmeriDebt and Cambridge also testified. These former ‘‘counselors’’ discussed the sales 

tactics they were instructed to practice in order to convince debtridden consumers to sign onto debt management plans (‘‘DMPs’’) 

rather than offering financial education or counseling. 

The second panel consisted of CCAs known for high-pressure 

sales of DMPs in conjunction with their operations as part of a forprofit conglomerate. The witnesses included representatives of 

AmeriDebt, American Financial Solutions (‘‘AFS’’), and Cambridge. 

These non-profit CCAs provided little to no counseling and education to consumers, poor service, and had a controversial relationship with their for-profit affiliates. For contrast, a member of the 

National Foundation for Credit Counseling (‘‘NFCC’’), an association of CCAs still following the ‘‘old school’’ model, testified about 

its very different approach to credit counseling. 

The for-profit affiliates to the above-mentioned CCAs comprised 

the third panel. The Ballenger Group, Amerix, and Brighton Debt 

Management Services provide processing services, marketing and 

advertising, lead generation, and other services to their non-profit 

CCAs. The Subcommittee found that these for-profit affiliates use 

their non-profit CCAs to generate significant revenues that are siphoned out of the non-profit CCAs through contracts at above market prices. Through these contracts, the for-profit affiliates exert a 

great deal of control over the non-profit CCAs by setting minimum 

rates for DMP sign ups and fee collections. 

Completing the hearing, on the fourth panel, was Commissioner 

Mark Everson of the Internal Revenue Service and Commissioner 

Thomas Leary of the Federal Trade Commission. Each discussed 

their agency’s actions to address abuses in the credit counseling industry. The Internal Revenue Service announced the implementation of a new program for reviewing the applications of credit counseling agencies for non-profit status. The IRS has also initiated audits of over 50 CCAs. Commissioner Leary discussed the Federal 

Trade Commission’s concerns about the industry and the actions it 

has taken against AmeriDebt and The Ballenger Group, as well as 

generally, to protect the American consumer from deceptive and 

unfair practices. Commissioner Everson stated in his testimony, 

‘‘Based on the FTC data and our examinations, it appears that 

some organizations are operating solely on the Internet and are 

4 

4For more information on the NFCC, visit the organization’s website at www.NFCC.org. 

providing debt management and not credit counseling. In many 

cases, credit counseling services have been replaced by promises to 

restore favorable credit ratings or to provide commercial debt consolidation loans.’’ Clearly, something is wrong with the credit counseling industry. 

III. OVERVIEW OF THE CREDIT COUNSELING INDUSTRY 

A. History of the Credit Counseling Industry 

The practice known as ‘‘credit counseling’’ was initiated by creditor banks and credit card companies during the mid-1960s in an 

effort to stem the growing volume of personal bankruptcies. Most, 

if not all, of the original CCAs were members of the National Foundation for Credit Counseling (‘‘NFCC’’).4 NFCC member agencies 

were generally community-based, non-profit organizations that provided a full range of counseling, often in face-to-face meetings with 

consumers. Trained counselors would advise consumers about how 

to remedy their current financial problems, counsel them on budget 

planning, and educate them as to how to avoid falling into debt in 

the future. These counseling sessions were traditionally one-on-one 

meetings in which an educated counselor performed a detailed 

analysis of an individual’s income, expenses, debts, and other budget requirements. A consumer would meet with a counselor more 

than once and for significant periods of time, often over an hour. 

After a budget analysis, the counselor might recommend that the 

consumer readjust his or her budget, utilize a debt management 

plan, or seek legal assistance, possibly to declare bankruptcy. 

From the outset, a popular credit counseling option was the ‘‘debt 

management plan’’ (‘‘DMP’’). In order to initiate a DMP, a consumer would authorize the credit counselor to contact each of the 

consumer’s unsecured creditors—primarily credit card companies. 

The counselor would then negotiate with each creditor to lower the 

consumer’s monthly payment amount, to lower the interest rate, 

and to waive any outstanding late fees. All of the consumer’s lowered monthly payments were then ‘‘consolidated’’ into a single payment. The consumer would send a single payment to the CCA, 

which would then distribute payments to each of the consumer’s 

creditors. 

DMPs were prevalent because each party involved—the consumer, the creditor, and the CCA—received a tangible benefit. Consumers got their finances under control and received concessions 

from their creditors, such as reduced interest rates, waiver of late 

fees, and forgiveness of overdue payment status. Creditors, rather 

than taking a loss from a bankruptcy, received all of the principal 

debt owed by the consumer. The CCA, in return for organizing the 

DMP, would receive ‘‘fair share’’ payments from the creditor to 

cover their expenses, salaries, and operational costs. The fair share 

remittance generally amounted to 12–15% of the payments received 

by the creditor as a result of the DMP. 

This mutually beneficial system operated smoothly for several 

decades. Some NFCC CCAs charged nominal fees or requested contributions from consumers. Such fees or contributions were used to 

defray their costs for counseling and initiating and maintaining the 

5 

5 NFCC 2002 Member Activity Report, p. 30. 

6Letter, dated 12/18/03, to the Subcommittee from IRS Commissioner Mark Everson, p. 2 

(‘‘Everson letter’’). 7 Everson letter, p. 2. 

8 Id. 

9 15 U.S.C. §§ 1679 et. seq. 

10 Credit Counseling in Crisis, Consumer Federation of America and the National Consumer 

Law Center (April 2003). 11 15 U.S.C. §§ 41 et. seq. 

DMP. Such fees and contributions were small in comparison to the 

creditor concessions received by the consumer. Today, the fees 

charged by NFCC CCAs remain minimal. The average initial fee to 

set up a DMP with a NFCC agency in 2002 was $23.09 and the 

average monthly maintenance fee was $14.5

Growth in consumer credit card debt in the 1990s however, 

brought many new and aggressive entrants into the credit counseling industry. Since 1994, 1,215 CCAs have applied to the IRS for 

tax exempt status under Section 501(c)(3).6 Over 810 of these applicants applied between 2000 and 2003.7 There are currently 872 active tax-exempt CCAs operating in the United States.8 Many of 

these new entrants are not centered around community-based, 

face-to-face counseling, but rather upon a nationwide, Internet and 

telephone-based model focused primarily, if not solely, upon DMP 

enrollment. Many of the new entrants are set up on a for-profit 

model. The for-profit model is designed to provide the maximum 

benefit to related for-profit corporations, which enter into contracts 

with non-profit CCAs to siphon off revenue from the CCA. A common method used by the for-profit entity to collect revenue from 

the CCA is to set itself up as a ‘‘back-office processing company,’’ 

which contracts to provide data entry and DMP payment processing for the CCA. The Subcommittee found that these contracts 

are often executed by officers or directors of a CCA who have familial ties or close business relationships with the owners of the forprofit entity. The Subcommittee also found that, in many instances, 

multiple non-profit CCAs would send processing fees to a single 

for-profit company, which reaped substantial profits. 

B. Current Law Governing the Credit Counseling Industry 

CCAs are almost exclusively organized as non-profits under 26 

U.S.C. § 501(c)(3). The Credit Repair Organizations Act of 1997 

(‘‘CROA’’) sought to regulate organizations claiming to offer ‘‘credit 

repair services.’’ 9 However, this legislation, which is administered 

by the Federal Trade Commission (‘‘FTC’’), does not apply to Section 501(c)(3) organizations. In fact, the significant increase in taxexempt CCAs roughly coincides with the passage of CROA, presumably because CCAs organized as non-profits to avoid CROA 

regulation.10 Moreover, the provisions of the Federal Trade Commission Act generally do not apply to organizations with tax-exempt status.11 Section 501(c)(3) status provides protection from 

scrutiny from many state regulators as well. 

Two more recent developments provide additional incentives for 

companies to enter the credit counseling industry with Section 

501(c)(3) status. First, prospective Federal bankruptcy legislation 

proposes requiring individuals to obtain credit counseling before 

being eligible to file for bankruptcy. If enacted, most likely the industry would see large increases in persons seeking their services. 

6 

12 26 U.S.C. § 501(c)(3). 13 Id. 14 IRS Publication 557, Tax-Exempt Status for Your Organization (Rev. May 2003), p. 17. 15 26 U.S.C. § 508(a). 16 Everson letter, p. 6. 17 IRS Publication 557, supra, at p. 8. 18Providing credit counseling is not an inherently charitable activity. Whether an organization providing credit counseling qualifies for exemption under Section 501(c)(3) depends upon 

whether the manner in which it provides such counseling serves recognized charitable or educational purposes. Treas. Reg. § 1.501(c)(3)–1(d)(2) provides that the term ‘‘charitable’’ is used 

in Section 501(c)(3) in its generally accepted legal sense, and includes relief for the poor and 

distressed or underprivileged. ‘‘Educational’’ as used in Section 501(c)(3) includes instruction of 

the public on subjects useful to the individual and beneficial to the community. Treas. Reg. 

§ 1.501(c)(3)–1(d)(3)(i)(b). 19 Rev. Rul. 69–441, 1969–2 C.B. 115. 20 Id. at *2–3. 21 Id. at *3. 

Second, in the same vein, the recent ‘‘Do Not Call’’ list, established 

by the FTC to prevent unwanted telephone solicitations, exempts 

‘‘charitable solicitations.’’ This exemption means CCAs with Section 

501(c)(3) status can continue to make telephone solicitations seeking business. 

A corporation may qualify for tax-exempt status under Section 

501(c)(3) if it is organized and operated exclusively for certain 

aims, such as charitable, religious, scientific, or educational purposes.12 No part of the corporation’s net earnings may inure to the 

benefit of any individual or any private shareholder in the corporation.13 The corporation may not be organized or operated for the 

benefit of any private interests, such as the interests of the creator, 

the creator’s family, any shareholders of the corporation, or any 

persons controlled directly or indirectly by such private interests.14

Organizations claiming tax-exempt status are required to apply for 

such status by filing an Application for Recognition for Exemption 

Under Section 501(c)(3) with the IRS.15 IRS agents review each application and recognize or deny tax-exempt status.16 Once an organization is recognized as having tax-exempt status, it must operate 

under the requirements of Section 501(c)(3) or risk losing its taxexempt status. Each year, the tax-exempt organization must file an 

information return with the IRS detailing its activities, revenues, 

and expenses.17

Credit counseling organizations have been recognized as proper 

tax-exempt entities for several decades.18 In 1969, the IRS affirmed 

that Section 501(c)(3) tax-exempt status was properly granted to an 

‘‘organization [that] provides information to the public on budgeting, buying practices, and the sound use of consumer credit 

through the use of films, speakers, and publications.’’ 19 The ruling 

noted that such organizations may enroll debtors in ‘‘budget plans’’ 

where the debtor makes fixed payments to the organization and 

the organization disburses payments to each of the debtor’s creditors.20 The budget plan services were to be ‘‘provided without 

charge to the debtor.’’ 21 The organization offered education to the 

public on personal money management through informative tools 

and provided individual counseling to ‘‘low income individuals and 

families.’’ An aspect of the counseling included the use of debt management plans constructed free of charge. This ‘‘free’’ service was 

possible because the primary source of funding for the organization 

was contributions from creditors through ‘‘fair share’’ contributions. 

Because the organization provided assistance to low income indiVerDate Aug 04 2004 02:47 Apr 15, 2005 Jkt 039010 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 E:\HR\OC\SR055.XXX SR055
7 

22 No. 78–0081, 1978 U.S. Dist. LEXIS 15942 (D.D.C. Aug. 18, 1978); see also, Credit Counseling Centers of Oklahoma v. United States, No. 78–1958, 1979 U.S. Dist. LEXIS 11741 (D.D.C. 

June 13, 1979). 23 Id. at *3. 24 Id. at *3–4. 25 Id. at *5. 26Treas. Reg. § 1.501(c)(3)–1(d)(3)(i)(b). 27Treas. Reg. § 1.501(c)(3)–1(d)(2). 28 Id. at (3). 

viduals without charge and provided education to the public, it 

qualified for tax-exempt status under Section 501(c)(3). 

In 1978, the U.S. District Court for the District of Columbia expanded the activities a CCA could perform under Section 501(c)(3) 

in Consumer Credit Counseling Service of Alabama v. United 

States.22 The ‘‘principal activities’’ of the CCAs were to, without 

charge, ‘‘provide (a) information to the general public, through the 

use of speakers, films, and publications, on the subjects of budgeting, buying practices, and the sound use of consumer credit, and 

(b) counseling on budgeting and the appropriate use of consumer 

credit to debt-distressed individuals and families.’’ 23 As an ‘‘adjunct’’ to those principal activities, agencies could enroll debtors in 

a ‘‘debt management program’’ for a ‘‘nominal’’ fee which ‘‘may not 

exceed the sum of $10.00 per month’’ and which is ‘‘waived . . . in 

instances where its payment would work a financial hardship.’’ 24

Only an ‘‘incidental’’ amount of revenue was to be realized by the 

agency through the debt management programs.25

In this case, the IRS had revoked the exempt status of Credit 

Counseling Services of Alabama because it did not restrict its services to the poor and it charged a nominal fee for its services. The 

IRS made this decision even though the agency provided free information on credit to the public and would waive its fee if it created 

a hardship. When CCCS of Alabama challenged the revocation, the 

court found that the agency fulfilled charitable purposes by educating the public on subjects useful to the individual and beneficial 

to the community without any fees.26 The court found the counseling program was both educational and charitable. The court 

found that the debt management plans were an integral part of the 

agency’s counseling function and thus were charitable and educational as well. The court also found the DMPs were incidental to 

the agencies’ primary function of education because the counselors 

spent only 12% of their time on the DMPs and the fees were nominal. 

Existing case law indicates that an organization may qualify for 

Section 501(c)(3) status if it is organized and operated for charitable purposes. The term charitable includes the relief of the distressed or poor.27 The term also includes educational organizations. 

The term ‘‘educational’’ includes (1) instruction or training of an individual for the purposes of improving or developing his/her capabilities and (2) instruction of the public on subjects useful and beneficial to the community.28 Thus the two components of education 

are individual training and public education. Whether a CCA operates exclusively for charitable purposes depends on the application 

of the operational test set forth in the IRS code: 

An organization will be regarded as ‘‘operated exclusively’’ for 

[charitable] purposes only if it engages primarily in activities 

8 

29Treas. Reg. § 1.501(c)(3)–1(c)(1). 30 Id. at (ii). 31See, e.g., est of Hawaii v. Commissioner, 71 T.C. 1067 (1979) (‘‘Nor can we agree with petitioner that the critical inquiry is whether the payments made to International were reasonable 

or excessive. Regardless of whether the payments made by petitioner to International were excessive, International and Est, Inc., benefited substantially from the operation of petitioner.’’); 

Church by Mail v. Commissioner, 765 F. 2d 1387 (9th Cir. 1985). 32See, e.g., American Campaign Academy v. Commissioner, 92 T.C. 1053, 1064 (1989), in 

which the Tax Court upheld denial of recognition of exemption under Section 501(c)(3) of an organization that provided training to political campaign workers because the organization’s services were provided to persons affiliated with a particular political party. 33Treas. Reg. § 1.501(c)(3)–1(e). 34 Elisian Guild, Inc. v. United States, 412 F.2d 121, 124 (1st Cir. 1969), rev’g 292 F. Supp. 

219 (D. Mass 1968). 

which accomplish one or more [charitable] purposes specified 

in Section 501(c)(3). An organization will not be so regarded if 

more than an insubstantial part of its activities is not in furtherance of a [charitable] purpose.29

An organization is not organized or operated exclusively for an 

exempt purpose unless it serves a public rather than a private interest. To meet this requirement, an organization must establish 

‘‘that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family, 

shareholders of the organization, or persons controlled, directly or 

indirectly, by such private interests.’’ 30 This prohibition covers 

‘‘inurement’’ of earnings to insiders in the form of excessive compensation or other benefits, but it can even apply where the benefit 

to the private interest is reasonable compensation that is no more 

than fair market value for the services.31 An organization may also 

be considered to serve private interests if it provides a substantial 

private benefit to outsiders who do not constitute a charitable 

class.32

A charitable organization may operate a trade or business if it 

furthers an exempt purpose. The regulations under Section 

501(c)(3) provide: 

An organization may meet the requirements of Section 

501(c)(3) although it operates a trade or business as a substantial part of its activities, if the operation of such trade or business is in furtherance of the organization’s exempt purpose or 

purposes and if the organization is not organized or operated 

for the primary purpose of carrying on an unrelated trade or 

business. . . . In determining the existence or nonexistence of 

such primary purpose, all circumstances must be considered, 

including the size and extent of the trade or business and the 

size and extent of the activities which are in furtherance of one 

or more exempt purposes.33

This test requires determining ‘‘whether the [organization’s] exempt purpose transcends the profit motive rather than the other 

way around.’’ 34 In the context of credit counseling, the regulations 

require determining whether the goal of the claimed educational 

activity is benefiting the public or simply generating profits for individuals and related businesses. 

Tax-exempt CCAs face harsh penalties from the IRS if they fail 

to confine their activities exclusively to educational and charitable 

purposes. If a CCA is held to have conferred private benefits or to 

have violated the prohibition on inurement, its tax-exempt status 

9 

35 26 U.S.C. § 4958(c)(1)(A). A ‘‘disqualified person’’ is someone who, at any time during the 

5 years preceding an excess benefit transaction, was ‘‘in a position to exercise substantial influence over the affairs of the organization.’’ 36 26 U.S.C. § 4958(a)(1). 37 Id. at (b). 38 15 U.S.C. § 45(a). 39 15 U.S.C. § 44; Sunshine Art Studios, Inc. v. FTC, 481 F.2d 1171 (1st Cir. 1973); Delaware 

Watch Co. v. FTC, 332 F.2d 745 (2d Cir. 1964). 

is subject to revocation. In lieu of having its exemption revoked, the 

IRS may instead choose to impose ‘‘intermediate sanctions’’ against 

the CCA or a related entity. Intermediate sanctions may also be 

imposed upon certain individuals who are not employed by the 

CCA but have engaged in an ‘‘excess benefit transaction’’ with the 

CCA, meaning that the person personally benefited from the CCA 

through, for example, drawing an excessive salary. An excess benefit transaction is any transaction where a CCA provides an economic benefit to a ‘‘disqualified person’’ that has a greater value 

than the value of goods or services that the CCA receives from the 

disqualified person.35 The tax code provides that, where an individual outside the CCA has substantial influence over the affairs 

of the CCA and engages in an excess benefit transaction with that 

CCA, the individual is subject to sanction. The sanction imposed 

upon such an individual is an excise tax equal to 25% of the excess 

benefit.36 Further, if the individual fails to correct the harm caused 

by the excess benefit transaction within the taxable period, a tax 

equal to 200% of the excess benefit may be assessed against the individual.37

In addition to the serious tax consequences that could be assessed against CCAs and their affiliated for-profit entities, consumer protection laws provide additional protection against improper conduct in the credit counseling industry. The Federal 

Trade Commission (‘‘FTC’’) is charged with enforcing Section 5(a) 

of the FTC Act, which prohibits unfair and deceptive acts or practices in or affecting commerce.38 Although the FTC generally lacks 

jurisdiction to enforce consumer protection laws against bona fide 

non-profits, it may assert jurisdiction over a CCA if the FTC can 

demonstrate that the CCA is ‘‘organized to carry on business for its 

own profit or that of its members,’’ that it is a ‘‘mere instrumentality’’ of a for-profit entity, or that it is operating within a ‘‘common enterprise’’ with one or more for-profit entities.39

The Subcommittee has uncovered alarming abuses of the preceding regulations by three credit counseling conglomerates, as described in the following section. 

IV. DEBTWORKS, AMERIX, AND CAMBRIDGE: THREE 

CASE STUDIES 

As noted above, the ‘‘traditional’’ CCA model has been in operation for several decades. This model was generally a communitybased, modest operation with minimal overhead and expenses. 

There were no large fees, no large executive salaries, no highpriced advertising blitzes, and no expensive marketing campaigns. 

Day-to-day operations were characterized by face-to-face meetings 

between consumers and credit counselors that lasted in some cases 

for several hours. If a consumer enrolled in a DMP, the employees 

of the CCA would negotiate with the consumer’s various creditors, 

10 

40Letter from Ballenger to Subcommittee, dated 11/26/03, at Exhibit A. 41Subcommittee interview of Ballenger representatives (3/12/04). 42 Articles of Incorporation, dated 12/23/96 (originally named Consumer Counseling Services, 

Inc.); AmeriDebt Form 1023, dated 3/19/97. 43Subcommittee interview of Ballenger representatives (3/12/04). 

set up the plan, and distribute payments to the creditors until the 

consumer’s debts were paid in full. The traditional CCA did not 

‘‘outsource’’ any of its essential functions to for-profit companies, 

and millions of dollars did not flow through the CCA to for-profit 

companies. 

The ‘‘new’’ CCA model has modified or even reversed the practices of the traditional CCA. The new model is characterized by 

high consumer fees and lucrative contracts that benefit related forprofit companies. The revenue generated through DMPs is seldom 

spent on improving or expanding education or counseling, but rather on advertising, marketing, and other activities unrelated to assisting consumers with their financial problems. Although there 

are likely scores of such new CCAs currently operating, this Report 

focuses on the following three major debt management groups: (1) 

DebtWorks and The Ballenger Group conglomerate, (2) the Ascend 

One-Amerix conglomerate, and (3) the Cambridge-Brighton conglomerate. 

A. DebtWorks and The Ballenger Group Conglomerate 

The first case study examines DebtWorks, Inc. (‘‘DebtWorks’’), 

later purchased by The Ballenger Group, LLC (‘‘Ballenger’’), which 

provides DMP processing services to 11 non-profit CCAs, including 

(1) AmeriDebt, Inc. (‘‘AmeriDebt’’), (2) A Better Way Credit Counseling, Inc. (‘‘A Better Way’’), (3) CrediCure, (4) Debticated Consumer Counseling, Inc. (‘‘Debticated’’), (5) Debtscape, Inc. 

(‘‘Debtscape’’), (6) DebtServe, Inc. (‘‘DebtServe’’), (7) Fairstream, 

Inc. (‘‘Fairstream’’), (8) Mason Credit Counseling (‘‘Mason’’), (9) 

Nexum Credit Counseling, Inc. (‘‘Nexum’’), (10) The Credit Network, Inc. (‘‘The Credit Network’’), and (11) Visual Credit Counseling (‘‘Visual’’). The aggregate consumer debt managed by those 

11 CCAs has exceeded $2.5 billion.40

(1) Formation of DebtWorks and The Ballenger Group 

Conglomerate 

DebtWorks was organized by Andris Pukke and his wife Pamela 

Pukke (also known as Pamela Schuster). Andris Pukke entered the 

credit counseling industry by organizing and operating a for-profit 

CCA in Gaithersburg, Maryland, called Consumer Debt Resources.41 In 1996, after the State of Maryland ordered Consumer 

Debt Resources to cease operations because it was a for-profit company, it began to wind down its affairs. At that same time, however, Pamela Pukke was organizing a non-profit CCA— 

AmeriDebt—Pamela Pukke acted as vice president, secretary, and 

director of the new CCA.42 Although not listed as an officer or director, Mr. Pukke regularly held himself out to be the president of 

AmeriDebt.43

After operating as a non-profit CCA for approximately 3 years, 

AmeriDebt decided to ‘‘spin off’’ its DMP processing function and 

turn it into a for-profit entity called DebtWorks, which was wholly 

11 

44 Articles of Incorporation of DebtWorks, Inc., Bates DWS 001538–1541. 45 Id.; Asset Purchase Agreement between AmeriDebt and DebtWorks, dated 9/1/99, Bates 

DWS 001526–1535; Fulfillment Agreement between AmeriDebt and DebtWorks, dated 9/1/99. 

AmeriDebt asserts that a ‘‘disinterested board’’ at AmeriDebt chose DebtWorks to be 

AmeriDebt’s DMP processor after reviewing several bids from other entities. Subcommittee 

interview of AmeriDebt representative (2/27/04). 46Subcommittee interview of AmeriDebt representative (2/27/04). 47 Id. 48 Id. 

owned and controlled by Mr. Pukke.44 DebtWorks was incorporated 

on July 21, 1999, purchased certain assets of AmeriDebt on September 1, 1999, and signed its first contract with AmeriDebt to provide DMP processing on the same day.45 AmeriDebt simply moved 

its DMP enrollment employees to a building next door while the 

DMP processing function (DebtWorks) remained in AmeriDebt’s 

original office space.46 AmeriDebt also opened ‘‘branch’’ DMP enrollment locations in New York and Florida. AmeriDebt was initially DebtWorks’ sole client, but that was soon to change as 

AmeriDebt officers, directors, and employees fanned out to form 

multiple CCAs, each of which subsequently contracted with 

DebtWorks for DMP processing services. 

Most or all of the 11 non-profit DebtWorks CCAs were organized 

by insiders of AmeriDebt or by friends of Mr. Pukke, including: (1) 

Edward Catsos, the managing director of AmeriDebt’s Florida office 

and who also organized DebtServe; 47 (2) Edward’s brother, James 

Catsos, who had served as AmeriDebt’s secretary and formed 

Debticated with Mr. Pukke’s brother, Eriks; 48 (3) Andrew Smith, 

who served as interim president for AmeriDebt and formed 

Fairstream; (4) William Sargent, an AmeriDebt counseling manVerDate Aug 04 2004 02:47 Apr 15, 2005 Jkt 039010 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 E:\HR\OC\SR055.XXX SR055

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49 Id., AmeriDebt 1998 Form 990, p. 7. 50Subcommittee interview of CrediCure representatives (4/7/04). 51 Id.; see also AmeriDebt 1998 Form 990, p. 7. 52Deed of Lease Agreement for The Credit Network, dated 5/13/99. 53For example, Eriks Pukke made approximately $51,000 as an AmeriDebt counseling man- ager, but makes $85,000 as president of Debticated. AmeriDebt 1997 Form 990, p. 7; Debticated 

2002 Form 990, p. 4. 54Fulfillment Agreement between Debticated and DebtWorks (8/1/00); Letter from IRS granting Section 501(c)(3) status to Debticated (8/16/00). 55See, e.g., A Better Way 2000 Form 990, indicating loan of $150,000 from Infinity Resources. 56Subcommittee interviews of Ballenger representatives (1/15/04 and 3/12/04). 57 Id. 58Subcommittee interview of Ballenger representatives (3/12/04). 

ager who formed Debtscape; 49 (5) Jeffrey Formulak and Richard 

Brennan, respectively vice president and general counsel of 

AmeriDebt who currently operate CrediCure; 50 and, (6) Harold 

Patrie, an AmeriDebt counseling manager, who formed The Credit 

Network.51 Matthew Case, the current chief operating officer of 

AmeriDebt and long time family friend of Mr. Pukke, acted as 

president of The Credit Network prior to his employment with 

AmeriDebt.52 This proliferation of CCAs served both the interests 

of DebtWorks and the various former AmeriDebt employees: 

DebtWorks was affiliated with a larger number of CCAs and could 

therefore capture a larger market share of the DMP enrollment 

business, while the former AmeriDebt employees apparently paid 

themselves higher salaries from their CCAs than they had received 

at AmeriDebt.53

The Subcommittee investigation uncovered significant evidence 

that these CCAs formed a common enterprise. Spirer & Goldberg, 

P.C., a law firm with a long-time relationship with Mr. Pukke, filed 

the Section 501(c)(3) applications for almost every CCA in the current conglomerate, including AmeriDebt, A Better Way, Mason, 

Nexum, Visual, The Credit Network, and Debticated. Moreover, in 

its application to the IRS, Mason listed its billing address as 12850 

Middlebrook Road in Germantown, Maryland—the address of 

DebtWorks. In addition, some of these CCAs, such as Debticated, 

signed a contract with DebtWorks before they were even granted 

non-profit status.54 At least two CCAs—A Better Way and Visual— 

received ‘‘start-up’’ loans from Infinity Resources Group, Inc. (‘‘Infinity Resources’’), a private lending institution wholly owned and 

operated by Mr. Pukke.55 None of the Section 501(c)(3) applications 

filed with the IRS by the new CCAs mentioned the fact that the 

applicant CCA intended to contract with DebtWorks for processing 

services, although each such CCA did. 

At the end of 2002, Mr. Pukke formed Ballenger for the purpose 

of purchasing the operating assets—the right to service DMP accounts—from DebtWorks.56 The DebtWorks managers then teamed 

with industry outsiders to execute a management buyout from Mr. 

Pukke for $43 million, financed with cash and a promissory note. 

Ballenger still owes Mr. Pukke and DebtWorks more than $37 million on this promissory note.57

Since DebtWorks and The Ballenger transaction, Ballenger has 

continued the practice of assisting with the organization of CCAs. 

For example, both Debtserve and Fairstream obtained start-up capital of $250,000 by way of a loan, which Ballenger signed as a secondary guarantor.58 In addition, both Debtserve and Fairstream 

13 

59 Id. 60See, e.g., Fulfillment Agreement between DebtWorks and Mason, dated September 6, 2001. 61 Id. at ¶ 4.1. 62 Id. at ¶ 2.3. 63 Id. at ¶ 6.4.2. 

were extended a functional line of credit by Ballenger for remittance of initial payments that were due to Ballenger.59

(2) Control of the Affiliated Credit Counseling Agencies 

DebtWorks exercised control of its affiliated CCAs through certain contracts, termed ‘‘Fulfillment Agreements,’’ with each CCA. 

Basically, the Fulfillment Agreements contracted all functions of 

the CCAs to DebtWorks except for the actual enrollment of consumers into DMPs: ‘‘DebtWorks shall perform all fulfillment, backoffice, and customer relations services for budget plan clients of 

[the CCA], with the exception of intake and counseling services.’’ 60

In effect, the CCA served as a mere ‘‘call center’’ from which consumers could be enrolled into DMPs. All operations from that point 

forward were contractually turned over to DebtWorks. 

After Mr. Pukke sold the DMP portfolio of DebtWorks to 

Ballenger, Ballenger added a new term to the Fulfillment Agreements that conferred additional control over the CCAs. Specifically, 

Ballenger added a term that charged each CCA a standard fee of 

$50 for each new DMP enrollment, and an additional $25 per 

month for each active DMP.61 However, if the CCA could not for 

some reason obtain the standard fee from the consumer, Ballenger 

required a minimum $20 start-up fee and a minimum $10 monthly 

fee for each DMP. As a result, each CCA was contractually required to pay Ballenger for each DMP that it initiated and maintained. Each CCA was therefore required to generate income from 

its consumers or be considered in breach, regardless of the fact that 

the income it generated from consumers supposedly consisted solely 

of ‘‘voluntary’’ contributions. The result was that Ballenger required each non-profit CCA to pay it for DMP enrollment and 

maintenance, even if a new DMP generated no revenue for the 

CCA. Such control over the CCA’s revenue limited the CCA’s ability to direct funding toward counseling, education, or other matters. 

Other provisions in the Fulfillment Agreement further demonstrated Ballenger’s control over its CCAs. For example, Ballenger 

required exclusive rights to each CCA’s consumer trust accounts 

and reserved the right to withdraw funds electronically as well as 

draw checks on those accounts. In fact, if the CCA itself accessed 

its account, it was deemed a breach of the agreement subject to termination and entitled Ballenger to ‘‘liquidated damages.’’ 62 Another provision in the Fulfillment Agreement allowed Ballenger to 

determine, by its sole discretion, that (1) a CCA was in breach of 

the agreement, and (2) if not cured within 30 days, Ballenger may 

transfer the CCA’s DMPs to another CCA serviced by Ballenger.63

Thus a consumer that signed up for a DMP with a particular CCA 

could be transferred to another CCA of Ballenger’s choice without 

consulting the consumer. In effect, Ballenger had total control over 

the DMP once established. 

14 

64DebtWorks 1999–2002 Form 1120S, Bates DWS 005411–5510. DebtWorks was allegedly unable to provide the Subcommittee with executed tax returns. This data was therefore taken from 

its draft returns. 65Treas. Reg. § 1.501(c)(3)–1(a), see also, Private Benefit Under IRC 501(c)(3), p. 135. 66 26 U.S.C. § 4958. 67 Ballenger Accounts Receivable, Bates 01241. 68Debticated promotional materials faxed to a consumer (name withheld) on February 28, 

2001 (emphasis in original). 

(3) Private Benefits to the For-Profit Corporations 

DebtWorks reported gross revenues of $2,160,100 in 1999, 

$15,411,072 in 2000, $38,066,044 in 2001, and $53,117,661 in 

2002.64 These figures document a 2359% increase in gross revenues 

over 3 years. In all, between 1999 and 2002, DebtWorks obtained 

nearly $109 million in gross revenues from its ‘‘non-profit’’ CCA affiliates. Even if those revenues were realized by DebtWorks 

through arms-length transactions at fair market value, the evidence suggests that the DebtWorks CCAs are not operating exclusively for exempt purposes, and therefore, may be in violation of 

tax regulations because they are providing excess benefits.65 If the 

revenues received by DebtWorks from their affiliated CCAs were 

the result of excess benefit transactions, then intermediate sanctions may be warranted.66

Servicing the DebtWorks portfolio has continued to be lucrative 

for Ballenger since its transaction with DebtWorks. In 2003, 

Ballenger realized gross receipts of $37,390,906.67 Ballenger is 

owed an additional $10.7 million from affiliated CCAs, most of 

which are in arrears. Like DebtWorks’ revenue, all of the revenue 

received by Ballenger comes from consumers who enroll in DMPs 

through the ‘‘non-profit’’ CCAs. 

Mr. Pukke also continues to profit from Ballenger’s CCAs by offering consumers debt consolidation loans through his company Infinity Resources. Several of the current Ballenger CCAs operate a 

program where they refer consumers to Infinity Resources, which 

charges a fee to process a consumer’s loan application and then 

profits from the interest earned on the loan itself. For example, 

Eriks Pukke’s CCA—Debticated—promotes the Infinity Resources 

debt consolidation loan as a key component of Debticated’s program: 

Debticated, Inc. is the ONLY company in the country that offers such a unique and beneficial debt consolidation program. 

Our ‘‘six month’’ program has revolutionized the debt consolidation industry by providing clients with the benefits associated with working with a non-profit credit counseling company, 

combined with the opportunity for a complete debt consolidation loan. 

If you successfully complete the [six month] program we will 

attempt to secure a debt consolidation loan for you. . . . This 

is the ultimate goal of the program.68

This advertisement indicates that the stated goal of Debticated is 

not to provide credit counseling, education, or debt management, 

but rather to refer consumers to a for-profit entity for a loan consolidation. Additionally, Debticated is hardly the ‘‘only’’ CCA that 

offers debt consolidation loans with Infinity Resources: A Better 

15 

69 A Better Way Form 1023, Tab D, dated January 20, 2000; The Credit Network Form 1023, 

Tab D, dated September 23 1999; Caroline E. Mayer, ‘‘Easing the Credit Crunch?,’’ The Washington Post, November 4, 2001. 70 Caroline E. Mayer, ‘‘Easing the Credit Crunch?,’’ The Washington Post, November 4, 2001. 71 Infinity Resources 1999–2002 Form 1120S, Bates DWS 005289–5410. Infinity Resources 

was allegedly unable to provide the Subcommittee with executed tax returns. This data was 

therefore taken from its draft returns. 72 26 U.S.C. § 4958. 73Subcommittee interview with Jolanta Troy (3/15/04). 

Way, The Credit Network, and AmeriDebt all offer the same service.69 Mr. Pukke and Infinity Resources have become the subject of 

a number of legal actions for their treatment of consumers referred 

to Infinity Resources by AmeriDebt. In addition to several civil lawsuits brought against Infinity Resources, Mr. Pukke pleaded guilty 

in 1996 to a Federal charge of defrauding consumers by falsely 

promising to broker debt-consolidation loans while pocketing excessive application fees.70 Nevertheless, between 1999 and 2002, Infinity Resources reported gross revenues in excess of $8.3 million.71

A referral by a non-profit CCA to a for-profit entity for debt consolidation loans does not serve any educational or charitable purpose. Such referral activities, if more than insubstantial, may constitute a private benefit to Infinity Resources that is prohibited 

under the tax code and could support revocation of the Section 

501(c)(3) status of any Ballenger CCA that makes such referrals. 

If the revenues received by Infinity Resources between 1999 and 

2002 were the result of excess benefit transactions, then intermediate sanctions may be warranted.72

(4) Harm to Consumers 

Consumer Jolanta Troy, who was harmed by AmeriDebt, testified 

about her experiences at the hearing on March 24, 2004. Ms. Troy 

was a 46-year-old mother of two children, ages 11 and 16, when 

she heard an AmeriDebt radio commercial. Ms. Troy had recently 

been divorced and began accumulating debt soon thereafter. Her 

job as a behavior specialist consultant working with mentally ill 

and behaviorally challenged children did not provide her with 

enough income to repay $30,000 in credit card debt and support 

her children. Ms. Troy contacted AmeriDebt in 2001, and was informed by Vicky, an AmeriDebt ‘‘counselor,’’ about the benefits of 

enrolling in a DMP. Ms. Troy told Vicky that she wanted to think 

about whether to sign up for a DMP, but soon thereafter received 

3 to 4 additional calls from AmeriDebt, pressuring her to enroll. 

Ms. Troy agreed to enroll and was told that her first payment would be $783. She was told to rush the payment by Western 

Union ‘‘so that her bills would be paid on time.’’ Vicky told her that 

she could make a voluntary contribution at a later date when she 

was more financially stable. Ms. Troy mailed in her $783 payment, 

but continued to receive calls from creditors. She then called 

AmeriDebt to inquire about her account and was informed that 

AmeriDebt had kept her first payment and had sent nothing to her 

creditors. Ms. Troy requested a refund and was denied, even after 

complaining to the Better Business Bureau. Ms. Troy then believed 

her only option was to declare bankruptcy, which she did later that 

year. Needless to say, she received no counseling or education from 

AmeriDebt during any of their telephone conversations.73

16 

74Profiteering in a Non-Profit Industry: Abusive Practices in Credit Counseling, March 24, 

2004, Official Hearing Record, Exhibit No. 14, p. 260. 75Profiteering in a Non-Profit Industry: Abusive Practices in Credit Counseling, March 24, 

2004, Official Hearing Record, Exhibit No. 12, p. 258. 76 Id. 77 Id. 

Ms. Troy’s experience with AmeriDebt appears to be all too common. Like most consumers with severe financial problems, Ms. 

Troy was vulnerable to the sales pitch of a company claiming to be 

a ‘‘non-profit’’ that would solve all her debt problems. She testified, 

‘‘The counselor said that AmeriDebt was a non-profit—like a charity—and I needed their help. Because AmeriDebt said it was a nonprofit, I thought I could trust them.’’ AmeriDebt counselors preyed 

on her fears and vulnerabilities with high-pressure sales tactics 

that were intrusive and often belittling. 

At the Subcommittee’s hearing, Senator Carl Levin questioned 

Matthew Case, the President of AmeriDebt, about such tactics. 

Senator Levin asked Mr. Case about an AmeriDebt script that tells 

employees how to respond to a consumer that says, ‘‘I can’t afford 

a contribution right now but maybe I can afford to contribute 

later.’’ The AmeriDebt script instructs the counselor to respond 

with: 

If you can afford to make a monthly payment, you can afford 

to make a contribution. That contribution is not going into our 

pocket. It is going to cover the costs of setting you up on the 

program. Would you rather have that payment go to us to help 

people like you get out of debt or would you like it to go into 

the creditor’s pocket as extra interest? Would you rather support a non-profit company or help a bank get richer? 74

Senator Levin asked Mr. Case ‘‘If you don’t call that pressure on 

somebody to make a contribution how would you label that?’’ ‘‘I 

would call it pressure,’’ Mr. Case said. 

Other examples of instructing AmeriDebt counselors how to 

quickly make a ‘‘sale’’ are found in the AmeriDebt employee training manual: 

• If you can assume a position of authority, you will find that 

people give it over to you without resistance. 75

• Create a sense of urgency, ‘‘Your creditors want you to get 

started as soon as possible. The quicker you get started, the 

faster you will be out of debt.’’ 76

• Be prepared! If you can’t answer questions or make the right 

point, it could be the difference in a sale or no sale. 77

By focusing on the sale of DMPs, the consumer misses valuable 

counseling and education addressing the source of the consumer’s 

financial problems. Senator Mark Dayton asked Mr. Case at the 

hearing, ‘‘Where is the counseling? What is the content of the counseling?’’ Mr. Case replied, ‘‘Right up front, there is a budget analysis done right away because different people are in different situations.’’ The Subcommittee finds that a simple budget analysis solely 

to determine if a consumer is a candidate for a DMP fails to meet 

the charitable purpose required of tax-exempt organizations. In addition, the consumer’s desperate state generally makes it easier for 

17 

78 NFCC 2002 Member Activity Report, p. 30. 79Subcommittee interview with John Paul Allen (2/21/04). 

AmeriDebt, and other companies like it, to persuade consumers to 

‘‘buy’’ a DMP at inflated prices with few services. As in Ms. Troy’s 

case, the non-profit status often provides a sense of trustworthiness 

that lowers the consumer’s scrutiny of both the DMP and 

AmeriDebt. 

The Subcommittee’s investigation also determined that the fee 

Ms. Troy was charged bore no relation to the cost of the services 

that would have been provided to her by AmeriDebt. The initial 

DMP start-up fee charged by AmeriDebt and the other 10 CCAs 

serviced by DebtWorks and Ballenger is based upon the consumer’s 

aggregate debt, rather than the actual expense of initiating a DMP. 

Specifically, the consumer is generally asked to make a contribution equaling 3% of their aggregate debt. For example, if a consumer owes a total of $25,000 the initial ‘‘contribution’’ would be 

$750 (3% of $25,000). In contrast, the start-up fee at the average 

NFCC member agency for a consumer who owes $25,000 would be 

$23.09.78

Furthermore, as in the case of Ms. Troy, consumers are often left 

with the impression that this initial fee amount will be sent to 

their creditors, when in fact it is retained by the CCA. Ms. Troy 

testified at the Subcommittee’s hearing, ‘‘I could not afford to give 

AmeriDebt almost $800. I thought the money would go to my credit 

cards to pay down the balances.’’ 

Aside from the initial start-up ‘‘contribution,’’ Ballenger also 

charged consumers a monthly DMP maintenance ‘‘contribution.’’ 

Again, the contribution amount was not based upon actual costs or 

the value of the service to the consumer, but upon the number of 

credit cards included in the DMP—generally $7 per credit card 

with a minimum of $20 per month and a maximum of $70 per 

month. Average monthly fees at NFCC members, in contrast, are 

$10 per month. 

The profit motive of AmeriDebt is also illustrated through its employee management practices. John Paul Allen, a former AmeriDebt ‘‘counselor,’’ testified at the hearing, ‘‘I should have seen a red 

flag during my interview with AmeriDebt when I was asked by my 

interviewers to sell them a stapler. That is really what AmeriDebt 

is about—sales.’’ AmeriDebt’s objectives are evident through management incentives such as bonuses for DMPs both in quantity and 

quality—the more DMPs signed up and the larger the first up-front 

payment, the larger the bonus for the counselor.79 NFCC and 

AICCCA member CCAs do not allow incentives tied to DMPs, because it gives counselors a motive to place consumers on DMPs instead of just providing counseling or financial education. In fact, 

Mr. Allen was reprimanded repeatedly for informing his customers 

that they did not have to pay the ‘‘voluntary contribution.’’ Allen 

testified, ‘‘My managers would say ‘Think of all the money you 

could make if you would collect those voluntary contributions.’ ’’ 

When consumers were hesitant to give a contribution, Allen testified, ‘‘We were instructed to say things like ‘Don’t you want us to 

18 

80 Id. 81 Id. 82 Amerix Active Clients and Total Debt as of October 2003, Bates AMX 000001. 83Stockholders of Ascend One Corporation, Bates AMX 000008. 

be around for the next person?’ or we would tell them that we were 

a non-profit and thus subject to audit by the IRS.’’ 80

Customer service was another AmeriDebt issue Allen had concerns with.81 He testified, ‘‘I would get calls from people two and 

three months after I set them up on a plan, complaining that their 

creditors still had not received a payment.’’ These situations, like 

Ms. Troy’s, are examples of consumers who were unaware AmeriDebt would keep the first payment. Since their creditors did not receive payment, the consumers accrued monthly late fees, and could 

end up in a worse financial predicament than when they started 

with AmeriDebt. 

B. The Ascend One-Amerix Conglomerate 

The second case study examines the Ascend One-Amerix conglomerate. Amerix Corporation (‘‘Amerix’’) provides DMP processing services for five non-profit CCAs: (1) American Financial Solutions (‘‘AFS’’); (2) Genesis Financial Management, Inc. (‘‘Genesis’’); (3) Consumer Education Services, Inc. (‘‘CESI’’); (4) Clarion 

Credit Management (‘‘Clarion’’); and (5) Debt Management Group. 

The combined consumer debt under the management of these five 

CCAs exceed $4.1 billion.82

(1) Formation of the Ascend One-Amerix Conglomerate 

Amerix is one of four for-profit companies wholly owned by a 

holding company called Ascend One Corporation (‘‘Ascend One’’), 

87% of which is owned by Bernaldo Dancel, the President and CEO 

of Ascend One.83 An organizational chart of Ascend One and its affiliates is shown below: 

In November 1992, Mr. Dancel founded a non-profit CCA called 

Genus Credit Management (‘‘Genus’’). In October 1996, Mr. Dancel 

split Genus into two parts, dividing the counseling function and 

DMP portfolio from the processing function. On October 3, 1996, 

Mr. Dancel incorporated Amerix as a for-profit business to provide 

DMP processing services for the Genus DMP portfolio. Mr. Dancel 

severed his management ties to Genus around that same time in 

order to run Amerix. 

Over the next several years, Amerix facilitated the establishment 

of several CCAs to serve as sources of revenue for Amerix. Amerix 


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19 

84Subcommittee interview of Amerix representative (1/30/04). 85See list of colleges, universities, and non-profits presented with start-up opportunity, Bates 

AMX 001732. 86Letter from AFS to Subcommittee, dated 11/19/03. 87Telephone interview of Clarion representative (3/9/04). 88Subcommittee interview of Amerix representative (1/30/04). 89Treas. Reg. § 1.501(c)(3)–1(c), see also, Private Benefit Under IRC 501(c)(3), pp. 135–39. 

approached community colleges and universities with the express 

purpose of proposing a ‘‘start-up’’ CCA.84 In all, between 1998 and 

2003, Amerix made presentations to almost 30 colleges and universities.85 Under normal circumstances, a new CCA is required to 

apply to the IRS for Section 501(c)(3) status. The IRS then has the 

opportunity to review the application of each new CCA and determine whether the applicant qualifies for non-profit status. However, by finding existing Section 501(c)(3) organizations (such as 

community colleges and universities) that could be used to establish CCAs, Amerix facilitated the establishment of new CCAs while 

bypassing the scrutiny of the IRS associated with applying for new 

Section 501(c)(3) status. In this manner, AFS was organized under 

the Section 501(c)(3) status of the North Seattle Community College Foundation.86 Other Amerix CCAs such as Clarion and Debt 

Management Group were similarly organized through pre-existing 

Section 501(c)(3) entities that did not perform credit counseling 

services prior to their relationship with Amerix.87 This practice effectively side-stepped IRS review of these new entrants into the 

credit counseling industry. 

In addition to Amerix (which provided DMP processing services), 

Ascend One created additional for-profit corporations to serve its 

CCAs, including FreedomPoint, 3C Inc., and FreedomPoint Financial. FreedomPoint marketed various specialized products such as 

‘‘prepaid’’ credit cards and tax settlement products to consumers 

carrying significant debt.88 3C Inc. owned the ‘‘CareOne’’ service 

mark under which Amerix’s CCAs are marketed to the public. 

FreedomPoint Financial served as a mortgage broker and marketed 

mortgage-related products to highly indebted consumers. Ascend 

One also operated a website called ‘‘CareOne,’’ which functioned as 

a referral service, matching inquiring consumers with the closest 

CCA in the Ascend One conglomerate. 

Some of the five CCAs in the Ascend One conglomerate referred 

consumers to FreedomPoint and FreedomPoint Financial. As noted 

above, a CCA will not be regarded as tax-exempt ‘‘if more than an 

insubstantial part of its activities is not in furtherance of an exempt purpose.’’ 89 Referrals by a non-profit CCA to for-profit entities selling credit cards, mortgage brokerage services, and other 

products are questionable because a non-profit must serve an educational or charitable purpose. Such referral activities, if more than 

insubstantial, may constitute a private benefit to Ascend One that 

is prohibited under the tax code and could lead to revocation of the 

Section 501(c)(3) status of each CCA that makes such referrals. 

(2) Control of the Affiliated Credit Counseling Agencies 

Although Amerix did not own any of the five CCAs it helped to 

establish, Amerix exerted control over them through its Service 

Agreements. The Service Agreements were generally entered into 

by Amerix and a new CCA as part of the CCA’s ‘‘start-up’’ arrangeVerDate Aug 04 2004 02:47 Apr 15, 2005 Jkt 039010 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 E:\HR\OC\SR055.XXX SR055
20 

90Service Agreement between Amerix and Genesis Financial Management, Inc., dated 9/9/02, 

¶ 14. Amerix’s other CCAs are also required to carry an Assist Rate of 30%. 91 Amerix Corporation v. Genesis Financial Management, Inc., No. 16 Y 181 00463 03, Before 

the American Arbitration Association, filed on 9/2/03. 92See, e.g., Service Agreement between Amerix and AFS, dated 10/18/02, ¶ 15. 93Private Benefit Under IRC 501(c)(3), p. 136. 94Subcommittee interview of AFS representative (1/22/04). 

ment. A key term in Amerix’s Service Agreement required CCAs to 

enroll 30% of their callers onto a DMP: ‘‘During the Term, [the 

CCA] agrees to maintain an Assist Rate of not less than 30%’’ 

where ‘‘Assist Rate’’ is defined as ‘‘the ratio of Client Commitments 

to First Time Calls per Counselor per month.’’ 90 That meant for 

every 10 calls received by a CCA, at least three must be placed into 

a DMP or the CCA was considered in breach of contract. Indeed, 

Amerix has taken legal action against one of its CCAs—Genesis— 

for its failure to maintain a 30% ‘‘assist rate.’’ 91 Such contractual 

requirements essentially remove the discretion and judgment of a 

credit counselor as to which consumers they should enroll in DMPs. 

In addition to the ‘‘assist rate’’ requirement, additional provisions 

in the Service Agreements required each DMP to generate a minimum of $30 each month per DMP, termed the ‘‘revenue standard.’’ 92 This requirement meant that each CCA was contractually 

required to find money from some source for each DMP to meet the 

‘‘revenue standard’’ in their Service Agreement. Each CCA was 

therefore required to generate income from its consumers or be considered in breach, regardless of the fact that all income generated 

from consumers was supposedly ‘‘voluntary.’’ 

The control granted to Amerix through the ‘‘assist rate’’ and ‘‘revenue standard’’ provisions indicates that Amerix’s CCAs may be operating for a private, rather than public, purpose. Control of a nonprofit by a for-profit is not permitted under the Internal Revenue 

Code due to the potential for abuse of the non-profit agency by the 

for-profit corporation. If a CCA ‘‘is closely controlled . . . by . . . 

a for-profit management company that operates with a great 

amount of autonomy’’ then the CCA must establish that the CCA 

is not organized or operated for the benefit of private interests, according to the IRS.93 This analysis is called the ‘‘operational test’’ 

and is usually conducted during the Section 501(c)(3) application 

process. Amerix’s practice of organizing CCAs through existing Section 501(c)(3) entities, however, deprived the IRS of the opportunity 

to determine the extent of control that Amerix would possess over 

associated CCAs when first established. 

(3) Private Benefits to the For-Profit Corporations 

On November 1, 2001, Mr. Dancel sold Genus’ DMP portfolio to 

AFS for $17 million. AFS told the Subcommittee that the sale price 

of the Genus portfolio was based upon the future revenues that 

would be generated by the portfolio from fees and fair share payments over a period of several years.94 AFS, however, was already 

under contract to pay Amerix for processing services on all of AFS’s 

DMP accounts. Therefore, AFS paid $17 million to Amerix for the 

DMP portfolio itself, and since that time has paid Amerix out of 

the revenues generated by the same portfolio. For example, in fiscal year 2001, AFS paid Amerix more than $70 million in processing fees for servicing their DMP portfolio and paid back over 

21 

95 AFS 2001 Form 990. 96 26 U.S.C. § 4958. 97See, e.g., Service Agreement between Amerix and AFS, dated 10/18/02, Schedule B, p. 20. 98 Id. 99Subcommittee interview of Genesis representative (2/24/04). The questionable practice of enrolling on a DMP entirely through the Internet is discussed below. 100 Amerix/Ascend One 1998–2002 Form 1120S, Bates AMX 001452–1730. 101Treas. Reg. § 1.501(c)(3)–1(a); see also, Private Benefit Under IRC 501(c)(3), p. 135. 102 26 U.S.C. § 4958. 

$7.4 million of the outstanding loan.95 Such ‘‘double payment’’ by 

AFS to Amerix for the same goods and services may constitute an 

excess benefit transaction under the Internal Revenue Code, and 

could subject Amerix to excise taxes on any excess benefit.96

Amerix and Ascend One have enjoyed great financial benefits 

from their contracts with the CCAs. Under the terms of Amerix’s 

‘‘Fee Schedule,’’ Amerix was to receive between 50–85% of every 

dollar received by the CCA. If a consumer contacted an Amerix 

CCA directly and enrolled in a DMP, then Amerix was to receive 

50% of all the non-profit’s revenue—enrollment fees, monthly fees, 

voluntary contributions, and creditor fair share payments—generated by that DMP in exchange for Amerix’s processing services.97

If the consumer contacted and enrolled with the CCA as a result 

of a referral from Amerix, Amerix was then entitled to 68% of all 

revenue generated by the DMP.98 Finally, if a consumer enrolled 

in a DMP entirely through the ‘‘CareOne’’ website, then Amerix 

was entitled to 85% of all revenue generated by the DMP.99 Such 

pricing levels were based not upon the cost of the processing services provided by Amerix, but rather upon the results of lead generation and marketing activities. 

The Service Agreements have, in fact, been lucrative for Amerix. 

Amerix reported gross revenues of $43,292,677 in 1998, 

$79,805,084 in 1999, $91,686,853 in 2000, $76,382,167 in 2001, and 

$95,286,442 in 2002.100 These figures represent an increase of 

120% in gross revenues during this time period. In all, between 

1998 and 2002, Amerix received $386 million in gross revenues— 

all of which was generated by the ‘‘non-profit’’ credit counseling industry. Even if the amounts above had been realized by Amerix 

through arms-length transactions at fair market value, the absence 

of any charitable or educational purpose suggests that the Amerix 

CCAs were not operating exclusively for exempt purposes and 

therefore may be in violation of tax regulations.101 If the revenues 

received by Amerix between 1998 and 2002 were the result of excess benefit transactions, then intermediate sanctions may be warranted against Amerix.102

(4) Harm to Consumers 

Like DebtWorks CCAs, some Amerix CCAs charged excessive 

DMP fees. On the other hand, at least two Amerix CCAs—AFS and 

Debt Management Group—had capped their fees as a result of 

their membership in the Association of Independent Consumer 

Credit Counseling Agencies. As such, the harm caused to consumers from unreasonable DMP fees was greatly mitigated at 

these two CCAs. Even these Amerix CCAs, however, failed consumers by neglecting to provide adequate counseling and education. 

22 

103See, e.g., Consumer Credit Counseling Service of Alabama v. United States, No. 78–0081, 

1978 U.S. Dist. LEXIS 15942 (D.D.C. Aug. 18, 1978). 104Subcommittee interview of Amerix representative (1/30/04). 105Subcommittee interview of Genesis representative (2/24/04). 106Subcommittee interview of AFS representative (1/22/04). 107 Jeanne Lang Jones, ‘‘A Strong Foundation: $17M Purchase Makes College’s Nonprofit Arm 

the Largest U.S. Credit Counseling Firm,’’ Puget Sound Business Journal, March 18, 2002. 

Amerix CCAs provided few services to their clients. Through Ascend One’s ‘‘CareOne’’ website and links at each of the Amerix CCA 

websites, a consumer was permitted to enroll in a DMP without a 

single contact with a credit counselor at any of the five CCAs in 

the Amerix conglomerate. Since a CCA’s charitable status is largely 

dependent upon its providing educational services, there is no reasonable reading of IRS regulations or case law that permits a CCA 

to enroll a consumer into a DMP without the consumers interacting 

with a credit counselor.103

Until March 24, 2004, Amerix employed between 30 and 40 

‘‘credit counselors’’ at its location in Columbia, Maryland. These 

‘‘counselors’’ provided DMP enrollment services for Amerix’s affiliated CCAs when a particular CCA could not at that moment provide services to a consumer. For instance, if a consumer on the 

East Coast telephoned AFS (located in Seattle) during the morning 

hours (before AFS was open for business) the caller was routed to 

Amerix in Maryland. From there, an Amerix ‘‘credit counselor’’ enrolled the consumer in a DMP. Any CCA that knowingly allowed 

its services to be transferred to a for-profit company, however, may 

be placing itself in jeopardy of losing its license in states that allow 

only non-profit agencies to provide credit counseling services. 

Amerix stated that the reason why it approached colleges and 

universities to pitch CCA ‘‘start-up’’ opportunities was because 

those organizations could educate consumers about their finances.104 It does not appear, however, that any Amerix CCAs provide classes to consumers on credit practices or budgeting. Genesis 

told the Subcommittee that it would like to provide counseling and 

education, but it was unable to do so due to a lack of funds after 

making the payments required under its Service Agreement with 

Amerix.105

Consumers who actually enrolled in a DMP with AFS were allowed access to a website that had some form of interactive program regarding spending and budgeting.106 However, AFS did not 

permit consumers who did not enroll in a DMP to have access to 

that website even though AFS’s non-profit mission is to provide 

counseling and education to all consumers in need of such help. 

AFS told the Subcommittee that, originally, it had high hopes of 

raising funds for grants and scholarships for students enrolled at 

North Seattle Community College. On March 18, 2002, shortly 

after AFS acquired the DMP portfolio of Genus, the CEO of AFS 

stated that ‘‘we’re generating more revenue than the foundation 

ever did. We anticipate giving (North Seattle Community College) 

in the multimillions of dollars over the next few years’’ and expected that their next donation would perhaps be in the milliondollar range.107 Although AFS obtained gross revenues of 

$75,165,312 during the following fiscal year, it managed to donate 

only 0.8% of that amount ($581,766) for the college’s grants and 

23 

108 AFS 2002 Form 990, pp. 1–2, Bates AFS 01849–01882. 109 AFS 2000 Form 990, pp. 1–2. 110Subcommittee interview of Cambridge and Brighton DMS representatives (1/20/04). 111 Cambridge Credit Corporation 1998 Form 1120S, Bates 00297–312; Brighton Credit Corporation 1998 Form 1120S, Bates 00230–243. 112 Id. 113Subcommittee interview of Cambridge and Brighton DMS representatives (1/20/04). 114 Id. 

scholarships.108 Ironically, 2 years prior to the AFS-Genus transaction, when AFS had total revenues of just $4,180,059, it donated 

16% of that amount ($673,306) in grants and scholarships.109

C. The Cambridge-Brighton Conglomerate 

The third case study examines the Cambridge-Brighton conglomerate, a complex web of interrelated non-profit and for-profit entities with overlapping directorates and ownership. The Subcommittee’s investigation has determined that the operations of the Cambridge-Brighton conglomerate were completely integrated and controlled by brothers John and Richard Puccio. Brighton Debt Management Services, Ltd. (‘‘Brighton DMS’’) provided DMP processing 

services to three CCAs: (1) Cambridge Credit Counseling Corp., a 

non-profit CCA based in Massachusetts; (2) Brighton Credit Management Corp., a for-profit CCA based in Florida; and (3) Cambridge/Brighton Budget Planning Corp., a CCA based in New York 

with a pending application for Section 501(c)(3) status. Debt Relief 

Clearinghouse Ltd. was the for-profit marketing arm for the conglomerate, and Cypress Advertising & Promotions, Inc. (‘‘Cypress’’) 

provided advertising services.110 Brighton DMS processed DMP accounts amounting to approximately $900 million of consumer debt. 

(1) Formation of the Cambridge-Brighton Conglomerate 

The Cambridge-Brighton conglomerate was originally organized 

by John and Richard Puccio as a for-profit enterprise. Two entities—Cambridge Credit Corporation (‘‘Cambridge Credit’’) and 

Brighton Credit Corporation (‘‘Brighton Credit’’)—were incorporated on April 20, 1993 and October 28, 1993, respectively, as 

for-profit corporations in New York.111 The two entities operated 

out of the same location.112 Cambridge Credit performed the DMP 

enrollment function while Brighton Credit performed the DMP 

processing services.113 In 1996, after operating for approximately 3 

years, the New York Banking Department served a cease and desist order prohibiting the two entities from performing credit counseling services in New York because they were for-profit organizations.114


Insert graphic folio 3 here SR55.003
24 

115 Brighton Mass. 1998 Form 1120S, Bates 00423–435 (Brighton DMS, incorporated on 

March 21, 2003, was originally incorporated and did business as ‘‘Brighton Credit Corporation 

of Massachusetts’’). 116 Cambridge 1997 Form 990, p. 16, Bates 00175; Subcommittee interview of Cambridge and 

Brighton DMS representatives (1/20/04). Brighton DMS was incorporated on March 21, 2003 to 

perform DMP processing for all Cambridge-Brighton CCAs. 117Letter from IRS to Cambridge, dated 2/12/98, Bates 00002–4. 118 Cambridge/Brighton Attachment to Form 1023, Bates 20698. 119 Cambridge/Brighton 2002 Form 990, Bates 20643–65. 120Debt Relief 2000 Form 1120S, Bates 00333–340; Cambridge/Brighton Attachment to Form 

1023, Bates 20701. 

The Puccio brothers moved their principal operations to Massachusetts where they formed several new corporations, including 

Cambridge Credit Counseling Corp. (‘‘Cambridge’’) and Brighton 

Credit Corporation of Massachusetts (‘‘Brighton Mass.’’), later 

known as Brighton Debt Management Services (‘‘Brighton 

DMS).115 As was the case in New York, one entity—Cambridge— 

was organized to perform the DMP enrollment function while a forprofit entity—Brighton Mass.—was organized to perform the DMP 

processing and to lease equipment, personnel, software, and provide ‘‘other services’’ to Cambridge.116 Cambridge applied for Section 501(c)(3) status, which was granted by the IRS on February 

12, 1998.117 In terms of aggregate debt, Cambridge is currently the 

largest CCA in the Cambridge-Brighton conglomerate. 

Despite the cease and desist order from the New York Banking 

Department, John and Richard Puccio incorporated another New 

York entity—the non-profit Cambridge/Brighton Budget Planning 

Corporation (‘‘Cambridge/Brighton’’)—on December 6, 1996.118

Cambridge/Brighton operated in the same space previously occupied by Cambridge Credit and Brighton Credit.119 Like Cambridge, 

Cambridge/Brighton was under contract with Brighton DMS for all 

processing services associated with its DMP portfolio. A third CCA 

was organized as a for-profit corporation in Florida—Brighton 

Credit Management Corp. (‘‘Brighton Credit Management’’). Like 

Cambridge and Cambridge/Brighton, Brighton Credit Management 

outsourced all of its DMP processing services to Brighton DMS. 

In addition, the Puccio brothers created two other wholly-owned 

and controlled, for-profit entities that conducted business with the 

three Cambridge-Brighton CCAs. On July 17, 1996, Cypress Advertising & Promotions, Inc. was created by the Puccios to ‘‘procure 

advertising space/time’’ for the Cambridge-Brighton CCAs. On January 27, 2000, another for-profit company named Debt Relief Clearinghouse, Ltd. (‘‘Debt Relief’’) was created by the Puccios to 

‘‘produce television infomercials’’ and operate a call center to screen 

calls for the Cambridge-Brighton CCAs.120 Both Cypress and Debt 

Relief operated from the same location as Cambridge/Brighton in 

New York. Each of the Cambridge-Brighton CCAs paid Debt Relief 

and Cypress for their services. In sum, although credit counseling 

is supposedly a ‘‘non-profit’’ industry, only two entities within the 

Cambridge-Brighton conglomerate were organized as non-profits. 

All of the revenue realized by the conglomerate was generated by 

consumers who enrolled in DMPs. 

(2) Control of the Affiliated Credit Counseling Agencies 

Unlike the Amerix and Ballenger conglomerates that exercised 

control over their CCAs through the terms of complex service conVerDate Aug 04 2004 02:47 Apr 15, 2005 Jkt 039010 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 E:\HR\OC\SR055.XXX SR055
25 

121 Cambridge Schedule of Officers and Directors, Bates 01120–01125. 122 Cambridge/Brighton 2002 Form 990, p. 4, Bates 20646. 123 Brighton Credit Management 2002 Form 1120S, Schedule K–1. 124Subcommittee interview of Cambridge and Brighton DMS representatives (1/20/04); Brighton Mass. 1998 Form 1120S, Bates 00432. 125Debt Relief 2000 Form 1120S, Bates 00339. 126 Cypress 2000 Form 1120S, Bates 00364. 127 Cambridge Credit 1998 Form 1120S, Bates 00309. 128 Brighton Credit 1998 Form 1120S, Bates 00240. 129 Administrative Services Agreement between Cambridge and Brighton DMS, dated 6/1/03. 130 Cambridge 2001 Form 990, p. 19, Bates 00085. 131 Client Subscription Services Agreement between Cambridge and Debt Relief, dated 1/1/03. 132 Advertising Services Agreement between Cambridge and Cypress, dated 4/1/99. 

tracts, the principals of Brighton DMS actually owned or controlled 

each of their three CCAs, Cambridge, Cambridge/Brighton, and 

Brighton Credit Management, as well as all of the affiliated forprofit entities, Brighton DMS, Debt Relief, Cypress, Cambridge 

Credit, and Brighton Credit. The Cambridge-Brighton non-profit 

CCAs (Cambridge and Cambridge/Brighton) were controlled by 

John and Richard Puccio through their positions as directors, officers, and ‘‘key employees.’’ John and Richard Puccio have served as 

directors of Cambridge since its inception.121 John Puccio served as 

president and director of Cambridge/Brighton, and Richard Puccio 

served as ‘‘strategic planner.’’ 122 Additionally, the for-profit entities 

in the Cambridge-Brighton conglomerate were wholly or collectively owned by John and Richard Puccio: 

CAMBRIDGE-BRIGHTON FOR-PROFIT 

ENTITIES 

JOHN PUCCIO 

(% Ownership) 

RICHARD PUCCIO 

(% Ownership) 

Brighton Credit Management 123 100% 0%

Brighton Mass.124 50% 50%

Brighton DMS 50% 50%

Debt Relief 125 100% 0%

Cypress 126 100% 0%

Cambridge Credit 127 50% 50%

Brighton Credit 128 50% 50%

Through their joint ownership and control of each entity in the 

Cambridge-Brighton conglomerate, John and Richard Puccio directed all operations and executed all contracts. Almost every possible operation of Cambridge, for example, was contracted out to a 

related for-profit entity. Cambridge paid Brighton DMS to provide 

processing for Cambridge’s DMP portfolio.129 Cambridge paid 

Brighton Mass. to lease its equipment, personnel, and software.130

Cambridge paid Debt Relief for referrals of consumers 131 and paid 

Cypress to place advertising.132 The level of control over the Cambridge-Brighton entities by John and Richard Puccio is illustrated 

by the fact that some of the entities within the conglomerate conducted millions of dollars of business with one another without any 

written contract. For example, Brighton Credit Management (the 

CCA based in Florida) had no contract with Brighton DMS or Debt 

Relief, but they have conducted business with one another for alVerDate Aug 04 2004 02:47 Apr 15, 2005 Jkt 039010 PO 00000 Frm 00029 Fmt 6633 Sfmt 6601 E:\HR\OC\SR055.XXX SR055
26 

133Private Benefit Under IRC 501(c)(3), pp. 135–39. 134 John Puccio was invited to testify at the Subcommittee’s hearing, however the night before 

the hearing, Mr. Puccio informed the Subcommittee of health problems that would prevent him 

from appearing. Mr. Viale, general manager for Cambridge, testified in his place. 135 Intangible Assets Sale Agreement between Cambridge, Cambridge Credit, and Brighton 

Credit, dated 11/27/96, Bates 00038–46. 

most 3 years. Such control of CCAs by for-profit organizations, 

whether under contract or not, may violate the ‘‘private benefit’’ 

prohibitions of the tax code.133 To illustrate this point, Senator 

Levin asked Chris Viale, the general manager of Cambridge, at the 

Subcommittee’s hearing, ‘‘And the people who control the non-profit 

also control the for-profit, is that fair to say?’’ Mr. Viale replied, 

‘‘Yes, that is fair to say.’’ 134

(3) Private Benefits to the For-Profit Corporations 

The for-profit entities in the Cambridge-Brighton conglomerate 

have realized great private benefits from the Cambridge-Brighton 

CCAs they control. These benefits have been realized in two principal ways: (1) the two original New York for-profit entities (Cambridge Credit and Brighton Credit) created and executed a windfall 

transaction by selling their ‘‘intangible assets’’ to the non-profit 

Cambridge, and (2) the for-profit entities in the current structure 

(Brighton DMS, Brighton Mass., Debt Relief, Cambridge Credit, 

Brighton Credit, and Cypress) have obtained large amounts of 

money from the non-profits, Cambridge and Cambridge/Brighton, 

through various service contracts. 

When Cambridge was organized in Massachusetts, John and 

Richard Puccio executed a transaction between Cambridge and 

their two original New York corporations (Cambridge Credit and 

Brighton Credit) in which the New York corporations ‘‘sold’’ their 

‘‘intangible assets’’ to Cambridge for $14.1 million. These ‘‘intangible assets’’ included ‘‘trademarks and goodwill in the marks utilizing ‘Cambridge’ and ‘Brighton’ . . . copyrights, general business 

goodwill, business plans, creditor contacts and relationships, referral source contacts and relationships, business ‘know-how,’ trade 

secrets and proprietary information.’’ 135 Since Cambridge had no 

money (being a newly-formed, non-profit organization), the two 

New York entities ‘‘loaned’’ Cambridge the necessary $14.1 million. 

John and Richard Puccio therefore created an artificial, ‘‘paper’’ 

debt that Cambridge would be obligated to pay back to them for 

purchasing the ‘‘intangible assets’’ of Cambridge Credit and Brighton Credit. In effect, John and Richard Puccio sold their ‘‘business 

goodwill’’ and ‘‘know-how’’ to John and Richard Puccio. 

As a result of this artificial sale, the Puccios required a non-profit agency (Cambridge) to pay two for-profit corporations (Cambridge Credit and Brighton Credit) $14.1 million plus interest instead of spending that money on improving education, expanding 

community outreach programs, or any other activity for which 

Cambridge had been granted tax-exempt status. Cambridge Credit 

and Brighton Credit have received repayments on the $14.1 million 

‘‘loan’’ over the past several years from revenue realized by Cambridge from DMP fees paid by consumers. Although Cambridge has 

50 years under the terms of the ‘‘loan’’ to repay the two New York 

entities, over $11.5 million has been paid back over the past 5 

years alone. This $14.1 million transfer may constitute an ‘‘excess 

27 

136 26 U.S.C. § 4958(c)(1)(A), (f)(1)(A). 137Treas. Reg. § 1.501(c)(3)–1(a). 138 Brighton Mass. 1998–2002 Form 1120S, Bates 00423, 00412, 00400, 00388, and 00375. 139See, e.g., Client Subscription Services Agreement between Cambridge and Debt Relief, 

dated 1/1/02, at ¶ 4(b). 140Debt Relief 2000–2002 Form 1120S, Bates 00333, 00324, and 00313. 141 Cypress 1999–2002 Form 1120S, Bates 00369, 00359, 00350, and 00341. 

benefit transaction’’ prohibited by the tax code.136 Indeed, the IRS 

may determine that Cambridge was arguably created in part for 

the purpose of generating $14.1 million for two related for-profit 

corporations, and may not have been organized exclusively for nonprofit purposes.137

Beyond the revenue generated by the 1996 ‘‘intangible assets’’ 

sale, the Subcommittee’s investigation determined that Cambridge 

has generated substantial additional revenues for the other forprofit entities in the Cambridge-Brighton conglomerate. In the Ascend One-Amerix and DebtWorks and Ballenger conglomerates discussed previously, all revenues generated by the CCAs streamed to 

a single entity. Specifically, in the Ascend One-Amerix conglomerate, all of the revenue from the CCAs streamed to for-profit 

Amerix, while in DebtWorks and Ballenger conglomerate all revenues streamed to for-profit DebtWorks or Ballenger. In contrast, 

the revenue streams were more diversified in the Cambridge-Brighton model. The three CCAs (Cambridge, Cambridge/Brighton, and 

Brighton Credit Management) have distributed their revenues to 

three or four for-profit entities, all owned and controlled by the 

Puccio brothers. The bulk of the funds generated by the three 

CCAs were allocated to Brighton DMS (formerly Brighton Mass.), 

Debt Relief, and Cypress. 

The primary function of for-profit Brighton DMS/Brighton Mass. 

was to provide DMP processing services, as well as to lease equipment, personnel, software and other goods and services to the Cambridge-Brighton CCAs. While it is not unusual in the credit counseling industry for a CCA to lease equipment, pay for potential 

leads, or pay for advertising, such payments are usually made as 

a result of arms-length transactions between unrelated parties at 

market rates. In the Cambridge-Brighton model, however, the revenues were transferred among related entities. 

Since 1998, Brighton DMS/Brighton Mass. has realized gross receipts in excess of $40.5 million.138 Since 2000, for-profit Debt Relief has produced television ‘‘infomercials’’ and operated a call center to screen calls for the Cambridge-Brighton CCAs. Debt Relief 

was paid $750 for each consumer it transferred to a CCA and who 

enrolled in a DMP.139 Through 2002, Debt Relief referrals have resulted in gross receipts of over $25 million.140 Cypress has served 

as an advertising agency for the Cambridge-Brighton conglomerate 

since 1999, and has realized gross receipts in excess of $6.5 million.141

While purportedly operating non-profit, educational entities, the 

individuals that own and operate the Cambridge-Brighton conglomerate have grown extremely wealthy from their activities. The IRS 

Form 990s submitted by Cambridge state that Richard and John 

Puccio each received a salary in 2001 of $624,000 for managing its 

operations. In addition they received compensation from related organizations of more than $600,000 in that same year. The SubVerDate Aug 04 2004 02:47 Apr 15, 2005 Jkt 039010 PO 00000 Frm 00031 Fmt 6633 Sfmt 6601 E:\HR\OC\SR055.XXX SR055
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142Subcommittee interview of Cambridge and Brighton DMS representatives (1/20/04). 143 26 U.S.C. § 4958. 144Treas. Reg. § 1.501(c)(3)–1(a) (‘‘[A]n organization must be both organized and operated exclusively for [tax exempt] purposes’’ or ‘‘it is not exempt.’’ 145Treas. Reg. § 1.501(c)(3)–1(c)(2). 146Subcommittee interview with Raymond Schuck (2/24/04). 

committee elicited some of this information related to Puccio’s salary through testimony at the March hearing from Chris Viale, the 

general manager. By way of contrast, Senator Mark Pryor asked 

the representative of a NFCC agency, ‘‘What is your salary at your 

non-profit?’’ The witness replied, ‘‘My annual salary is sixty thousand dollars.’’ As noted above, organizations do not qualify for nonprofit status under Federal regulations if they are organized or operated for the benefit of individuals associated with the corporation. 

The Subcommittee has been told that the IRS has initiated an 

audit of Cambridge.142 As part of that audit, the IRS should determine whether the revenues received by Cambridge Credit and 

Brighton Credit from the sale of their ‘‘intangible assets’’ amounted 

to an excess benefit transaction and to what extent, if any, excise 

taxes should be assessed.143 Additionally, the IRS should determine whether Cambridge was organized or now operates for private benefit and, if so, whether its Section 501(c)(3) status should 

be revoked.144 Finally, the IRS should examine the organization 

and operation of Cambridge/Brighton, whose Section 501(c)(3) application is currently pending. Since Cambridge/Brighton was designed to operate in a similar manner to Cambridge, the IRS 

should fully scrutinize its application in order to determine whether it is organized and operated for the public benefit and to ensure 

that its assets do not inure to the benefit of any private individual.145

(4) Harm to Consumers 

The Subcommittee interviewed a former client of Cambridge, 

Raymond Schuck, to evaluate the CCA’s services. Mr. Schuck told 

the Subcommittee that, in the summer of 2001, he had $90,000 in 

debt distributed among nine credit cards.146 After hearing about 

Cambridge on the radio, he called them and spoke with a counselor. Mr. Schuck said that the counselor suggested a debt management plan, and promised him a reduction in interest rates. After 

answering a list of questions about his various credit cards. Mr. 

Schuck said that the counselor told him that his monthly payment 

would be $1,946 and that Cambridge would charge him 10% of his 

monthly payment for their services, or $194 a month. Mr. Schuck 

testified at the hearing, ‘‘I thought that $194 was high, but I knew 

very little about the industry and what were appropriate fees. I 

made the apparently naı ̈ve assumption that because it was a nonprofit agency, I could trust them.’’ 

Mr. Schuck said the counselor told him to hurry and send the 

first monthly payment to Cambridge to get the program started. 

He immediately sent in a cashier’s check. Although he had already 

sent in the check to Cambridge, Mr. Schuck said that he started 

getting calls from some of his creditors asking why he had not 

made any payments. As in Ms. Troy’s situation with AmeriDebt, 

the creditors told him that they were unaware that he was on a 

29 

147 Unfortunately, Cambridge’s fee schedule is not unique in the industry. The Subcommittee’s 

investigation identified several other CCAs who charged an initial fee equal to one month’s payment, including Express Consolidation, Inc. of Delray Beach, Florida, and CreditCare Credit 

Counseling, Inc. of Boca Raton, Florida. 

DMP with Cambridge and told him that no payments had been received. 

Mr. Schuck said that he called Cambridge to find out what was 

going on. He said he found it very difficult to contact someone in 

customer service who could tell him about his account. Mr. Schuck 

said at the hearing, ‘‘Getting in touch with someone who knew 

about my debt management plan and the status of my payments 

was an exercise in frustration.’’ When Mr. Schuck did speak with 

Cambridge, he was informed that the first payment he had sent 

was a fee for initiating his DMP. He testified, ‘‘I was absolutely 

shocked by this information. Had I known this policy in advance, 

I would have searched for a different credit counseling agency.’’ Mr. 

Schuck continued, ‘‘I would not have agreed to give Cambridge 

$2,000 when that money could have gone to my creditors.’’ 

Ultimately, Mr. Schuck declared bankruptcy. Mr. Schuck said 

that he felt that if Cambridge had done a reasonable analysis of 

his financial circumstances, the proper recommendation would 

have been to seek legal assistance and declare bankruptcy. In addition, because Cambridge kept his first payment without his knowledge, Mr. Schuck missed payments to nine creditors. As a result, 

Mr. Schuck’s credit rating now bears the consequences of missed 

and late payments as well as the bankruptcy. Unfortunately, Mr. 

Schuck’s experience was very consistent with current and former 

clients interviewed by the Subcommittee. 

The fee structure of the Cambridge-Brighton CCAs was the highest of any CCA that the Subcommittee investigated.147 The fees 

were clearly excessive and bore no relation to the actual expense 

of initiating and maintaining a DMP. At the hearing, Senator 

Levin questioned Chris Viale, the general manager of Cambridge, 

‘‘Shouldn’t it [the fee] relate to the services rendered?’’ Mr. Viale, 

said ‘‘No.’’ Senator Levin went on to ask, ‘‘But you keep that first 

monthly fee regardless of what subsequently comes in terms of benefits to that consumer, is that correct?’’ Mr. Viale said, ‘‘That is correct.’’ 

The Subcommittee determined that the initial start-up fee 

charged to a consumer by the Cambridge-Brighton conglomerate— 

the ‘‘Payment Design Fee’’—was typically an amount equal to the 

consumer’s monthly payment. The vast majority of these monthly 

payments were several hundred dollars, and many were in excess 

of $1000 or even close to $2000. The result was that the Cambridge-Brighton CCAs routinely charged a consumer $500 or $1000 

for merely setting up a DMP. Like AmeriDebt and Ballenger CCAs, 

the Cambridge-Brighton CCAs retained this fee instead of sending 

it to creditors. Also like AmeriDebt, the Cambridge-Brighton CCAs 

too often failed to adequately disclose that fact to clients. Like 

many other consumers who dealt with Cambridge, Mr. Schuck was 

not informed that his ‘‘Payment Design Fee’’ of $1,946 would not 

go to his creditors, but would in fact be kept by Cambridge. The 

monthly DMP ‘‘Program Service Fee’’ charged by Cambridge-Brighton CCAs was also high. The amount had no relation to CamVerDate Aug 04 2004 02:47 Apr 15, 2005 Jkt 039010 PO 00000 Frm 00033 Fmt 6633 Sfmt 6601 E:\HR\OC\SR055.XXX SR055
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148 NFCC 2002 Member Activity Report, p. 30. 149Subcommittee interview of former Cambridge employee (2/2/04). 150 Id. 151 Id. John Pohlman worked at the Consumer Credit Counseling Services of Southern New 

England prior to working at Cambridge. 

bridge’s actual expenses but was instead set at 10% of the monthly 

DMP payment. Therefore, a consumer who was already paying an 

$800 monthly payment would also be required to pay an $80 maintenance fee each and every month. By contrast, the average NFCC 

agency’s monthly DMP maintenance fee in 2002 was $14.148

A related problem uncovered by the Subcommittee is that the initial 10% fee does not reflect payment for actual services rendered. 

Cambridge gets the ‘‘Payment Design Fee’’ (10% of total debt) upfront (as well as their monthly service fee). However, Chris Viale 

testified at the Subcommittee’s hearing that, although its plans are 

designed to last 60 months, ‘‘The average length of time for a consumer on the plan is 23 months. We have a little over a thirty percent completion rate [for their program].’’ This data is clear evidence of Cambridge’s understanding that although they were 

charging a financially-strapped consumer in advance for 60 months 

of service, the likelihood that the consumer would actually require 

Cambridge’s services for the full term of their plan was less than 

one-third. The fact that two-thirds of their client base failed to finish the plan, cutting short any services obligated by Cambridge, 

was not evident in their fee structure. 

Still another problem identified by the Subcommittee involves 

the bonuses paid to CCA employees. The ‘‘credit counselors’’ in the 

Cambridge-Brighton CCAs were given bonuses for enrolling consumers on DMPs and could accumulate bonus money equal to as 

much as 25% of their clients’ aggregate start-up fees for the 

month.149 Additionally, counselors could earn 2-week trips to Florida and other prizes by placing consumers on DMPs.150 At the 

same time, like the counselors at other new CCAs, CambridgeBrighton ‘‘credit counselors’’ appeared to provide minimal credit 

counseling. Mr. Schuck told the Subcommittee that he was on the 

phone with his ‘‘counselor’’ for a mere 20 minutes before he was 

convinced to mail a cashier’s check for $1,946 to set up his DMP. 

When asked by Chairman Coleman at the Subcommittee’s hearing 

about how many people received face-to-face counseling, Mr. Viale 

responded, ‘‘Approximately 10 to 20 a day.’’ Unfortunately, most 

Cambridge clients do not receive face-to-face counseling. They receive, as Mr. Schuck did, a sales pitch over the telephone. 

John Pohlman, a former Cambridge credit counselor, testified at 

the Subcommittee’s hearing about his experiences at Cambridge. 

Mr. Pohlman offered a unique perspective having worked for a 

NFCC agency for 11 years before going to work for Cambridge.151

Mr. Pohlman described a ‘‘boiler-room’’ mentality at Cambridge. He 

testified that on his first day he was forced to pick a fake name 

to use when dealing with consumers. He also testified, ‘‘There was 

an electronic board at the front of the room that reminded me of 

the leader’s board in a golf tournament. It had the names of the 

counselors who had the top sales for the month flashing in red and 

yellow lights.’’ Incentives like this, the bonuses, and the free trips 

and other gifts exhibit an obvious emphasis on the DMP. ConVerDate Aug 04 2004 02:47 Apr 15, 2005 Jkt 039010 PO 00000 Frm 00034 Fmt 6633 Sfmt 6601 E:\HR\OC\SR055.XXX SR055
31 

sumers unfit for a DMP could fall prey to counselors with self-serving motives who fail the consumer in need of education or counseling, or perhaps, as in Mr. Schuck’s case, an attorney to file 

bankruptcy. 

Mr. Pohlman also testified about his dissatisfaction with the 

level of scrutiny Cambridge gave consumers’ financial circumstances. Through his experience working at NFCC agencies, 

Mr. Pohlman believed a worthwhile counseling session should last 

an hour to an hour and a half in order to get all necessary information. Mr. Pohlman said that at Cambridge, this process was expected to last 10 to 15 minutes. He testified, ‘‘This was all the time 

we needed, however, because the only information we got from the 

consumer was account information. There was no true budget analysis done for the consumer, just an analysis to determine whether 

their creditors would allow the consumer to enroll in a debt management plan.’’ He went on to say, ‘‘I was uneasy with the fact that 

I did not know anything about a person’s mortgage payment, 

health care costs, car insurance, etc. . . . I knew nothing about 

them except they were in debt.’’ 

Mr. Pohlman admitted that with the limited amount of time he 

spent with the consumer, he had little confidence that they understood that the first payment went to Cambridge and not to their 

creditors. Mr. Pohlman testified, ‘‘The goal was to authoritatively 

take them (the consumer) through the process of getting signed up 

on a plan as quickly as possible so they did not have time to consult a spouse or family member.’’ Mr. Pohlman said, ‘‘I was even 

instructed by one member of management to quote ‘Treat them like 

alcoholics.’ In other words, they know they need help—make them 

get it. I truly believe that Cambridge preyed on consumers’ desperation.’’ 

Mr. Schuck’s and Mr. Pohlman’s testimony offers a great deal of 

insight into Cambridge’s profit-driven approach to credit counseling. Their experiences suggest that when profit motives are injected into a traditionally non-profit industry, harm to consumers 

may follow. When Senator Pryor asked Mr. Viale, ‘‘Why did you 

choose to operate under a non-profit label?’’ Mr. Viale responded, 

‘‘Well, I don’t have a specific answer for that, but I know the industry forces us to be a non-profit.’’ 

V. REGULATION AND ENFORCEMENT 

The credit counseling industry is currently governed by a patchwork of professional, state and Federal standards, some of which 

are mandatory and others of which are voluntary. They include 

standards issued by credit counseling professional associations, 

guidelines issued by creditors, state statutes, and Federal tax and 

fair trade laws. 

A. Industry Self-Regulation 

The credit counseling industry has two major membership associations, the NFCC and the Association of Independent Consumer 

Credit Counseling Agencies (‘‘AICCCA’’), each of which has issued 

32 

152 Another organization, the American Association of Debt Management Organizations 

(‘‘AADMO’’), is a trade association that does not maintain membership standards. 153 NFCC information production to the Subcommittee, 9/10/04. 154 Id. 

mandatory membership standards for their members.152 The NFCC 

standards, adopted through the Council on Accreditation for Children and Family Services (‘‘COA’’), are the more restrictive of the 

two. COA is an independent third-party not-for-profit accrediting 

body that has reviewed or accredited more than 1,400 international 

social service programs.153

If applied throughout the industry, these professional standards 

could significantly address the abusive practices identified in this 

Report. For example, agencies seeking COA accreditation are reviewed in eight specific areas: 

• Mission and Purpose—determines whether consumer 

needs and preferences guide the organization in its design 

and delivery of services. 

• Quality Assurance—evaluates the effectiveness and efficiency of services provided and corrects any observed deficiencies. 

• Governance and Administration—determines whether 

the organization is governed and administered according to 

legal requirements and sound principles of effective management and ethical practice, evaluated by neutral oversight 

through a diversified board. 

• Human Resources—evaluates the organization’s ability to 

deploy personnel and foster efficient, effective service delivery for clients. 

• Service Environment—ensures safe, accessible, and appropriate delivery for the needs of clients, employers, and other 

stakeholders. 

• Financial Management—ensures that an organization 

manages its fiscal affairs according to sound financial practices and applicable statutory and professional requirements. 

• Professional Practices—determines whether services are 

conducted with due regard to ethical and professional requirements and protects confidential information regarding 

clients. 

• Service Delivery—ensures that an organization focuses its 

services on identifying the needs and problems of clients.154

In addition, to obtain and maintain accreditation, all NFCC 

member agencies must adhere to a rigid set of COA standards specific to the credit counseling industry. The standards include the 

following: 

• Agencies must have annual audits of operating and trust accounts. 

• Agencies must be licensed, bonded, and insured. 

• Agencies must support and provide a variety of consumer 

education programs. 

33 

155 Id. 156 Id. 157 NFCC information production to the Subcommittee. 158 NFCC 2004 Member Quality Standards. 159 Id. 160 Id. 161The ISO 9000 Quality Systems Handbook, Fourth Edition, David Hoyle, ButterHeinemann, 2001. 

• Agencies must comply with consumer disclosure requirements. 

• DMPs must include a detailed review of current and prospective income, as well as present and anticipated financial obligations. 

• Funds are disbursed to creditors on behalf of the clients at 

least twice per month. 

• Clients have a variety of deposit options including electronic 

methods, and are offered immediate correction of improper 

postings. 

• Each client receives counseling, including an assessment of 

how he/she got into trouble, and a written comprehensive financial action plan. 

• Clients receive a statement, at a minimum, every quarter.155

All agencies must be re-accredited by COA every 4 years. Additionally, all NFCC agencies are required to abide by strict Member 

Quality Standards.156

On August 18, 2004, the NFCC announced that it had tightened 

its member standards to prohibit questionable practices.157 The 

NFCC enhanced seven existing member quality standards and 

added four new member quality standards.158 With the additions 

and modifications, the NFCC specifically prohibited the payment of 

bonuses to credit counselors, announced that public relations and 

marketing activities do not qualify as educational activities, and 

prohibited charging fees in advance of services.159 Additionally, the 

NFCC required all members to complete their submission for COA 

certification within 9 months of their application to COA (which is 

half the time previously required) and to establish a formal system 

of addressing consumer complaints. It also specifically prohibited 

the practice of ‘‘pre-screening’’ consumers for DMPs.160

AICCCA maintains similar standards as part of the code of practice to which its members must adhere. For instance, AICCCA sets 

a maximum initial fee of $75 for setting up a DMP and a maximum 

$50 fee for monthly maintenance. 

Several CCAs have pointed to their compliance with an industry 

standard named ISO 9000 as ensuring that they adhere to high 

standards. ISO 9000 is a generic set of quality assurance standards 

that are followed by many large businesses, but it is not specific 

to the credit counseling industry.161 Pursuit of ISO 9000 standards 

may be helpful as a first step toward improving performance, because it requires careful documentation of business procedures. But 

ISO 9000 does not address business products or services. For instance, nothing in the ISO 9000 standard provides guidance to an 

34 

162The creditors interviewed by the Subcommittee typically viewed fair share payments as a 

form of voluntary contribution to a non-profit agency, rather than as payment for a contracted 

service. However, many creditors apparently treat these payments as ordinary business expenses rather than take charitable deductions for them on their tax returns. 

entity on how much it can charge, what services it should offer, or 

what should be done with excess funds. 

Self-regulation also has limitations. First, although NFCC and 

AICCCA standards are mandatory for members, joining the association itself is voluntary. CCAs that wish to operate pursuant to 

lower business standards or no standards can simply refuse to join. 

Unrestrained by strict standards of practice, these CCAs may even 

obtain a competitive advantage over those who adhere to more ethical conduct. Second, it is unclear whether the associations have 

the resources and mechanisms needed to monitor and consistently 

enforce compliance with their standards. Weak enforcement reduces the efficacy of even strong standards. 

B. Creditor Standards 

A second source of credit counseling standards lies not with the 

CCAs themselves, but with the large creditors, such as banks and 

credit card operating companies, which interact with CCAs on a 

regular basis. Large creditors often support CCAs by providing 

them with a percentage of the payments made by the debtors that 

the CCAs counsel. Often referred to as ‘‘fair share,’’ these payments 

are intended to reimburse some operating costs in exchange for the 

CCAs’ positive work in helping debtors repay their debts. Many of 

the largest creditors have developed standards to determine which 

CCAs are eligible to receive fair share payments. If well developed 

and carefully enforced, the Subcommittee believes these standards 

could play a major role in reducing abuses and encouraging best 

practices within the credit counseling industry. 

(1) History of the Creditor-Credit Counseling Agency 

Relationship 

In the late 1950s, credit card issuers played a key role in developing what we refer to today as the credit counseling industry. 

Originally, they helped establish local offices, known as Consumer 

Credit Counseling Services (‘‘CCCSs’’), which offered face-to-face 

counseling related to an individual’s finances. These counseling sessions were viewed as comparable to other social services available 

at the time such as substance abuse or family counseling. These 

CCCSs took a comprehensive approach to treating a consumer’s financial instability. Through tools such as debt management plans, 

referrals to other social agencies (to address other problems associated with the symptoms of the financial stress), and adequate financial education and counseling, these CCCSs nursed debt-ridden 

consumers back to financial health. 

The NFCC is the parent organization of the CCCSs and historically has worked with creditors to operate and fund these non-profit credit counseling agencies through fair share payments.162 The 

purpose of these fair share payments was to provide funding for 

the non-profit agencies to establish educational programs, implement debt management programs, and assist with operating exVerDate Aug 04 2004 02:47 Apr 15, 2005 Jkt 039010 PO 00000 Frm 00038 Fmt 6633 Sfmt 6601 E:\HR\OC\SR055.XXX SR055
35 

163 Historically, 60% of NFCC funding came from creditors and 40% came from charities. Subcommittee interview of NFCC representatives (1/12/04). 164Subcommittee interview with Citigroup representatives (3/9/04); Bank One operating expenses spreadsheet, Bates BO 253–254. 165 Common ways to measure success rates are: (1) retention rate (the length of time a consumer stays on the DMP), (2) declination rate (the number of proposed DMPs declined by the 

creditor), and (3) a combination of those two measures as well as other factors. 166 Individual NFCC members may still have representatives from the local banking community on their board of trustees. 

penses.163 This funding afforded CCAs the financial freedom to 

offer their services to customers without charge or to make payment of a modest fee voluntary. The consumers’ voluntary contributions were relatively small amounts and were waived when necessary for hardship cases. 

Fair share payments are typically paid by creditors on a monthly 

basis on the aggregate debtor payments managed by a CCA. Until 

the mid-to-late 1990s, this payment was typically 12–15% of the 

aggregated debtor payments. In recent years, the expense associated with fair share payments has increased, at times taking up 

25–30% of the budgets of the collections departments at major 

creditors.164 This increase has caused some creditors to reduce 

their fair share payments to a lower percentage. In addition, to improve the debt management plans they receive, some creditors have 

moved to performance-based fair share models. These models link 

the percentage of fair share payments each credit counseling agency receives to the success rates of the DMPs that the creditor receives from each CCA. 165

In addition to their historic funding relationship with non-profit 

CCAs, major creditors have traditionally acted in an advisory role 

for the NFCC through membership on the NFCC’s board of directors. The close ties between creditors and NFCC members, however, led to the filing of two legal actions. In 1994, a number of 

independent CCAs filed an antitrust suit against the NFCC, its 

member agencies, and the Discover Card. The plaintiffs alleged 

that the NFCC members and the creditors were operating to prevent new agencies from offering certain credit counseling services. 

The parties eventually entered into a settlement agreement which, 

in part, removed the creditors from the NFCC’s national board of 

directors.166 In 1996, the NFCC entered into an agreement with 

the FTC to require its members to disclose the fact that they receive fair share payments from creditors. It is noteworthy that nonNFCC members are not required to disclose this information, even 

though they receive the same payments. 

In the mid-1990s, the rapid increase in consumer debt dramatically increased the number of potential clients. Some new CCAs 

began using more technologically advanced practices to implement 

their DMPs through innovative software. Some also launched heavily funded advertising and marketing campaigns using late night 

television infomercials and the Internet. Through these practices, 

these new entrants to the credit counseling market were able to 

reach hundreds of thousands of potential clients. The ability to 

reach and serve a national market has gradually shifted the industry from a local, community-based, client-specific operation to include nationwide, mass-marketed sales operations. 

As consumer debt reached new heights during the late 1990s and 

early 2000s, the DMP became the method of choice recommended 

36 

167The Subcommittee’s concern is not with DMPs per se, but whether distressed consumers 

are inappropriately placed onto DMPs instead of receiving counseling or education to address 

the financial problem. 168 A minimum standards model requires that certain minimum criteria be met before any fair 

share payments will be made to a credit counseling agency. 169 Industry-accepted accreditation organizations include COA, BSI, BVQI, and ISO 9000 with 

an accepted ‘‘Code of Practice.’’ NFCC and AICCCA have each developed a code of best practices 

for their members that set accreditation standards. 

to consumers by many of the new CCAs to resolve unsecured debt 

problems. These CCAs used DMPs to generate two streams of revenue, one from creditors providing them with fair share payments, 

and the second from consumers charged DMP start-up and monthly 

maintenance fees. 

Even without some CCAs’ aggressive advocacy of DMPs, the 

rapid increase in consumer debt over the last decade would likely 

have produced a sharp increase in the use of DMPs.167 At the same 

time, as fair share payments also increased, it should not surprise 

anyone that creditors began to examine the nature of this growing 

expense. Some creditors apparently concluded that the wrong consumers were being placed on DMPs. For example, consumers who 

could afford to pay their debts but were looking for a break in interest rates were unnecessarily and incorrectly placed on DMPs. As 

a result, the creditors heightened the level of scrutiny of proposed 

DMPs. Some creditors also began issuing more detailed CCA and 

DMP standards, in effect becoming a regulator of credit counseling 

practices. 

(2) Three Creditor Models 

The Subcommittee interviewed three major creditors to gain an 

understanding of the industry as well as of actions taken by the 

creditors towards CCAs. These creditors were Bank One Delaware, 

N.A. (‘‘Bank One’’), MBNA America, N.A. (‘‘MBNA’’), and Citigroup, 

Inc. (‘‘Citigroup’’). The Subcommittee found that all three have promulgated standards for CCAs seeking fair share payments, and 

that all three have recently revised and tightened their standards 

to eliminate abusive practices. 

(a) Bank One 

Bank One utilizes a combination of a minimum standards 

model 168 and a performance-based model when deciding whether 

to make fair share payments to a particular CCA. Bank One told 

the Subcommittee that before it will even consider making fair 

share payments, a CCA must be equipped to make debtor payments and submit debtor proposals electronically, and it must not 

be involved in any pending litigation. The agency’s business eligibility is then assessed, and Bank One said the CCA must meet the 

following minimum standards: 

• The CCA must be accredited; 169

• The counselors employed by the CCA must be certified; 

• Any fees charged to consumers must meet Bank One guidelines; and 

• The CCA’s marketing budget and content must be approved 

by the CCA’s board. 

37 

170Subcommittee interview of Bank One representatives (2/10/04). The new model was implemented in July 2003. 171Subcommittee interview of MBNA representatives (2/17/04). MBNA’s new model was implemented in February 2004. 172MBNA allows outsourcing only for payment processing. 

Once these criteria were met, Bank One told the Subcommittee 

that it would make a maximum of 9% fair share payments to the 

CCA. It said that a CCA which meets the business eligibility requirements received a minimum of 2%, and the CCA may receive 

up to an additional 7% depending upon the performance of its portfolio of DMPs.170 Bank One explained that its performance criteria 

measure the average fixed payment and the default rate of the 

agency, both equally weighted to provide a maximum of 3.5% in additional fair share payments for each criteria. In addition, Bank 

One said that it measures a CCA’s performance in meeting a ‘‘New 

Inventory Criteria’’ which measures whether the agency is continuing to sign up new Bank One card members or just administering existing Bank One accounts. 

(b) MBNA 

MBNA told the Subcommittee it also utilizes a minimum standards model coupled with a performance-based model.171 MBNA 

said that it had set minimum requirements that must be met before a CCA qualifies for any fair share payments: 

• The CCA must be accredited; 

• The CCA must have non-profit status under Section 

501(c)(3); 

• The CCA may not be affiliated with any entity that is not 

a Section 501(c)(3) agency; 172

• All DMP proposals and debtor payments must be transmitted electronically; 

• A complete budget disclosure must be attached to all DMP 

proposals; 

• No DMP start-up fee may exceed $75, no monthly fee may 

exceed $50, and there can be no fee assessed for early termination of the DMP; 

• At least 90% of the CCA’s consumers must have completed 

a full budget disclosure; and 

• At least 85% of the DMP proposals submitted by the CCA 

must meet MBNA’s criteria for establishing a DMP. 

Upon meeting these criteria, MBNA said that it assesses a CCAs’ 

DMP portfolio to measure its payment volume and portfolio vintage. MBNA explained that the older the DMP account, the larger 

the percentage of fair share available, starting with 2% for brand 

new accounts and rising to a maximum of 15% for accounts that 

last 36 months or more. 

38 

173Subcommittee interview with representatives of Citigroup (2/20/04). Citigroup’s new model 

was implemented on January 1, 2004. 174 Citigroup model letter to CCA, dated November 4, 2003, Bates CC 00073–74. 175 Id. 176 Information provided by Citigroup 8/24/04. 177 Id. 

(c) Citigroup 

Citigroup told the Subcommittee that it had recently introduced 

a fair share model new to the credit counseling industry.173 In fact, 

Citigroup indicated that it had abandoned the fair share model altogether in favor of a new ‘‘Grant Program.’’ Under this program, 

Citigroup said that it will pay CCAs according to Citigroup’s ‘‘perception of the agency’s needs and the benefits they provide to the 

customer and the community.’’ 174 Citigroup explained that these 

payments will be made in quarterly advances of a lump sum contribution, 175 and the amount of payment will reflect Citigroup’s 

judgment of the value that the CCA is delivering to consumers, 

based on a 29 question ‘‘application.’’ The questions in the 

Citigroup application address many of the same issues utilized by 

other industry leaders to assess CCAs, including whether the CCA 

has non-profit status, appropriate business practices and structure, 

and low start-up and monthly fees. CCAs must also submit to and 

pass an audit by Citigroup. 

Citigroup said that its new grant program took effect in 2004. 

Citigroup said that, since it began, approximately one-third of the 

agencies who previously received fair share from Citigroup did not 

qualify for grant funding under the eligibility criteria.176 However, 

those agencies that did qualify for grant funding received a higher 

payment than they historically received under the former fair 

share model, according to Citigroup.177

(3) Using Fair Share Payment Standards to End Abuses 

The collective impact on the credit counseling industry of the 

minimum and performance-based standards issued by major creditors such as Bank One, MBNA, and Citigroup could be substantial. 

Since many CCAs depend upon fair share revenue as a major 

source of income, they are obligated to comply with creditor standards. Creditors may therefore play a major role in eliminating some 

of the abusive practices examined in this Report. Standards setting 

limits on fees, for example, directly attack the problem of CCAs’ 

charging excessive fees unrelated to costs. Standards restricting or 

prohibiting CCAs from affiliating themselves with for-profit entities 

addresses the core of the profiteering problem. Some of the performance-based requirements also encourage CCAs to initiate only 

DMPs that set realistic goals for consumers. 

As with the professional standards set by credit counseling associations, the effectiveness of the creditor standards will depend in 

large part upon the extent to which the creditors monitor compliance and discontinue fair share payments to CCAs that do not comply with their standards. Creditors informed the Subcommittee 

that they felt limited in their ability to police the industry, and 

some expressed reluctance to condition the concessions they provide 

to a debtor upon the debtor’s choice of a particular CCA. Some 

creditors also worry about appearing to favor some agencies over 

39 

178Subcommittee interviews with NFCC and AICCCA representatives (10/16/03, 10/9/03). 179 Citigroup model letter to CCA, dated 11/4/03, Bates CC 00073–74. 180 Id. 181 A CCA may request a quarterly payment in advance; however, the weight Citigroup affords 

any such request is unknown, since Citigroup pays CCAs according to a perception of their 

needs and the benefits provided to customers and the community. Subcommittee interview of 

Citigroup representatives (2/20/04). 

others, although choosing to do business with some entities and not 

others is a routine business decision encountered every day in the 

marketplace. 

CCAs are less sanguine about the creditor standards. A common 

CCA complaint is the absence of uniformity among creditor standards that can translate into higher costs and administrative burdens for agencies.178 Creditors respond that, while uniformity in 

criteria for fair share payments may be desirable, current antitrust 

laws prohibit creditors from collectively agreeing on common standards. Another common CCA complaint is that creditors retain the 

right to change their criteria without notice and may apply changes 

retroactively. CCAs also contend that sudden changes to creditor 

criteria leave them with little time to respond. This complaint applies not only to the amount of fair share payments the creditor 

will pay, but also to the terms a creditor will offer debtors under 

a DMP. 

CCAs also assert that the ambiguous tone of some fair share 

policies and an inability to obtain creditor clarification complicates 

the job of administering DMPs. For example, Citigroup announced 

its new ‘‘grant’’ program on November 4, 2003.179 Some CCAs complained that the criteria for determining fair share payments under 

this program are subjective, leaving agencies unsure of how to operate in order to maximize their Citigroup fair share payments. 

Citigroup also required CCAs to respond by November 24, 2003, 

only 20 days after receiving notice of the change in policy, 180 which 

some CCAs complained left them with little understanding of what 

to expect from Citigroup and an inability to plan their operating 

budgets.181

These developments suggest that bad actors have had a disproportionate impact on the credit counseling industry. As the Report has detailed, some new entrants have heavily marketed DMPs 

and failed to properly scrutinize the consumers placed on DMPs. In 

turn, creditors were forced to react to the increased volume of 

DMPs for which they were paying fair share. After finding inappropriate consumers placed on DMPs, many creditors reduced their 

fair share. Although an appropriate reaction to the activities of 

some new entrants, it is an unfortunate result for the CCAs that 

have traditionally provided quality services with careful selection of 

candidates for DMPs. Subcommittee Chairman Coleman questioned 

James Kroening, the director of an NFCC agency, Family Means, 

about this phenomenon at the Subcommittee’s hearing. Mr. 

Kroening testified, ‘‘It is my belief that we have seen a major decrease in creditor support for our type of counseling and debt management work that we do related specifically to the number of new 

entrants and the number of folks that they are putting on plans. 

Specifically, I believe it is related to the fact that many people are 

being put into debt management plans that simply do not need it 

and creditors have seen their line item expense go [through] the 

40 

182 Available at www.law.upenn.edu/bll/ulc/UCDC/Feb2004modelbill.pdf. 183 Available at www.law.upenn.edu/bll/ulc/UCDC/Mar2004mtgdraft.htm. 

roof.’’ This is another negative side effect of the new entrants profit-driven practices. 

Ultimately, CCAs concede that creditors have no obligation to 

make any fair share payments to them. Many smaller creditors, in 

fact, do not typically provide fair share payments to CCAs. Thus, 

they recognize that creditors have the right to condition these payments as they see fit. Since having debtors pay their debts is in 

the best interests of the creditors, and many CCAs provide worthwhile counseling and debt management services that assist debtors 

in meeting their financial responsibilities, major creditors indicate 

they are likely to continue making fair share payments. Thus, creditor standards related to fair share payments continue to provide 

a valuable mechanism for curbing abusive practices in the credit 

counseling industry. 

C. State Regulation and Enforcement 

Although many states have statutes concerning the credit counseling industry, effective regulation at the state level is hampered 

due to the wide variety of differing state requirements and inadequate resources for monitoring compliance. In addition, many 

states still lack legislation directly applicable to the credit counseling industry. In these states, general laws against false advertising and fraud provide the only protection for consumers. In other 

states with laws that at least partially relate to credit counseling, 

the statutes were written when the industry generated few complaints, and therefore, either limit credit counseling to non-profit 

agencies or provide non-profits with an exemption from mandatory 

requirements. This type of exemption is the primary reason why 

many of the CCAs discussed in this Report applied for Section 

501(c)(3) status. In recent years, a few states, such as Maryland, 

have passed more comprehensive laws dealing specifically with the 

debt management industry. 

The widespread use of the telephone and Internet by CCAs to 

contact and service consumers also inhibits effective state enforcement. Many CCAs assert that they do not need to be licensed in 

a state unless they maintain a physical presence in that state. 

Under this interpretation, a company located in Maryland could 

contact and serve consumers in every other state without obtaining 

separate state licenses or being bound by laws of the states in 

which its consumers reside. Those CCAs that attempt to comply 

with the laws of each state in which they serve consumers are burdened by a mix of different regulations and bonding requirements. 

Currently two alternatives offering model legislation for states to 

adopt are available. In February 2004, the National Consumer Law 

Center and the Consumer Federation of America jointly issued a 

Model Consumer Debt Management Services Act.182 In March 

2004, the National Conference of Commissioners on Uniform State 

Laws discussed a draft of the Consumer Debt Counseling Act.183

Both laws would impose much tighter licensing and business practices on all credit counseling agencies. 

41 

184District of Columbia v. AmeriDebt, Inc. and Andris Pukke, Superior Court of the District 

of Columbia. 185State of Illinois v. AmeriDebt, Inc., Circuit Court of the Seventh Judicial Circuit, Sangamon 

County. 186State of Minnesota v. AmeriDebt, Inc., District Court, Fourth Judicial District. 187State of Missouri v. AmeriDebt, Inc., Circuit Court of St. Louis City. 188State of Texas v. AmeriDebt, Inc., et al., District Court of Travis County, Texas. 189Testimony of Commissioner Mark Everson before the House Ways and Means Committee, 

Subcommittee on Oversight (11/20/03). 190 Everson letter, p. 1. Section 6103 of the Internal Revenue Code prevents the IRS from publicly revealing the identities of the CCAs currently under audit. 191 Id. at p. 7. 

In many states, the most significant regulatory action has come 

from suits filed by state attorneys general. In addition to an earlier 

action brought by the District of Columbia, 184 the attorneys general in Illinois, 185 Minnesota, 186 Missouri, 187 and Texas 188 have 

each filed lawsuits against AmeriDebt over the past few years. 

These suits have typically charged AmeriDebt with consumer fraud 

and deceptive business practices such as false advertising, misrepresentation, non-disclosure of fees, and failure to obtain the 

proper licenses. The Subcommittee believes that these suits have 

convinced AmeriDebt to stop enrolling new consumers into DMPs. 

Nevertheless, they do not necessarily prevent the same business 

model from being used by other CCAs or conglomerates. 

D. Federal Regulation and Enforcement 

On the Federal level, two key agencies, the U.S. Internal Revenue Service and the Federal Trade Commission, are aware of the 

major problems in the credit counseling industry, and have taken 

steps to enforce the tax code and the Federal Trade Commission 

Act, respectively. 

(1) The Internal Revenue Service 

As the Report notes, CCAs typically apply for non-profit status 

under Section 501(c)(3) of the Internal Revenue Code. The IRS has 

recognized more than 850 credit counseling organizations as tax exempt under Section 501(c)(3).189 The non-profit status of CCAs 

arose mainly by historical pattern, rather than pursuant to any 

specific decision by Congress. When creditors established the first 

CCAs, they set them up as non-profits, presumably because of the 

tax savings and because this status harmonized with their original 

purpose of providing debtors with general financial education in exchange for little or no fee. State laws often made non-profit status 

a legal requirement to conduct debt proration activities within 

their borders. 

As the recent problems in the credit counseling industry began 

to surface, the IRS has taken several steps to address the problems 

both retroactively and prospectively. Retroactively, the IRS has initiated audits of 50 CCAs, including nine of the fifteen largest CCAs 

in terms of gross receipts.190 The IRS Commissioner informed the 

Subcommittee that the Service will not hesitate to revoke the Section 501(c)(3) designation of any CCA that has abused its non-profit 

status.191 The process for revoking non-profit status is fairly 

lengthy. The IRS must conduct a full audit of the agency’s finances 

and make a formal finding that it does not qualify as a Section 

501(c)(3) organization under the statute. The non-profit can appeal 

42 

192 Id. at p. 4. 193 Id. 194 Internal Revenue Service information production to the Subcommittee 9/1/04. 195 Id. 196 Everson letter to the Honorable Amo Houghton, dated 7/15/04, p. 1. 197Proof of Claim for Internal Revenue Taxes, In the Matter of AmeriDebt, Case No. 04– 

23649, filed 6/5/04. 198 Everson letter to the Honorable Amo Houghton, dated 7/15/04, p. 1. 199 Id.at p. 3. 200 Internal Revenue Service information production to the Subcommittee 9/1/04. 201 Everson letter to the Honorable Amo Houghton, dated 7/15/04, p. 3. 202 Id. 203Office of the Chief Counsel, Memorandum No. 200431023. 

this decision both within the IRS and in the courts. In addition, the 

IRS is considering giving more explicit guidance on what the law 

requires of non-profits, which would put CCAs on formal notice of 

the standards they should follow. 

Prospectively, the IRS has taken measures to subject new CCA 

applications for Section 501(c)(3) status to greater scrutiny. It has 

formed a specialized group within the IRS called the Consumer 

Credit Service Compliance Team to develop and pursue strategies 

to address: (1) inurement and private benefit issues, and (2) issues 

related to CCAs that operate as commercial businesses.192 The 

Compliance Team currently has 12 staff members, including technical specialists, examination agents, and attorneys from the Office 

of Chief Counsel.193 These individuals review the applications, including budgets and outsourcing contracts, of new CCAs to ensure 

that they plan to operate as bona fide non-profits. 

Since the Subcommittee’s hearing on March 24, 2004, the IRS 

has identified 59 CCAs for examination.194 It has contacted 39 of 

the selected CCAs and has begun examinations.195 It has already 

proposed revoking the tax-exempt status of one Section 501(c)(3) 

credit counseling agency.196 In June 2004, it filed a $15 million suit 

against AmeriDebt in anticipation of revoking its Section 501(c)(3) 

status.197 The IRS has also sent denial letters to four applicants for 

exempt status because the organizations were operating for the 

substantially non-exempt purpose of marketing and selling debt 

management plans for the private benefit of insiders and related 

commercial entities.198

As a result of these efforts, the IRS will have about 50% of the 

total revenues of the credit counseling industry under examination.199 For those CCAs under examination, the IRS has identified 

individuals and businesses that are involved in a scheme to create 

CCAs as a front for related for-profit businesses.200 Referrals have 

been made to investigate these abusive tax shelter promotions. The 

referrals include the promoter, all related entities and individuals, 

as well as the attorney and the CPA.201

To combat such violations, the IRS has announced revisions of its 

Form 990, Return of Organization Exempt from Income Tax, and 

the Form 1023, Application for Tax Exempt Status Under Section 

501(c)(3).202

On July 30, 2004, the IRS also released a memorandum of legal 

analysis related to the revocation of Section 501(c)(3) status for 

credit counseling organizations.203 This can be viewed as a sign of 

the IRS bracing for litigation ahead as it implements its more 

43 

204 15 U.S.C. § 45(a). 205 15 U.S.C. § 44. 206See Sunshine Art Studios, Inc. v. FTC, 481 F.2d 1171 (1st Cir. 1973); Delaware Watch Co. 

v. FTC, 332 F.2d 745 (2d Cir. 1964). 207Testimony of Commissioner Thomas Leary at Subcommittee hearing, Profiteering in a NonProfit Industry: Abusive Practices in Credit Counseling, March 24, 2004. 208FTC v. AmeriDebt, Inc., et al., Case No. PJM 03cv3317, United States District Court for 

the District of Maryland; FTC v. The Ballenger Group, LLC, et al., United States District Court 

for the District of Maryland. 

stringent practices, most likely leading to the revocation and denial 

of exempt status for existing organizations. 

(2) The Federal Trade Commission 

The FTC is charged with enforcing Section 5(a) of the FTC Act, 

which prohibits unfair and deceptive acts or practices affecting 

interstate commerce.204 The FTC lacks jurisdiction, however, to enforce consumer protection laws against bona fide non-profits. Nevertheless, the FTC may assert jurisdiction over a CCA if it demonstrates that the CCA is ‘‘organized to carry on business for its 

own profit or that of its members.’’ 205 Alternatively, the FTC may 

assert jurisdiction over a non-profit CCA if it is a ‘‘mere instrumentality’’ of a for-profit entity, or if it operates through a ‘‘common enterprise’’ with one or more for-profit entities.206 Even with these jurisdictional issues to contend with, the FTC has made inroads in 

enforcing the FTC Act against CCAs who may be abusing their 

non-profit status and engaging in unfair or deceptive practices. 

At the Subcommittee’s hearing, FTC Commissioner Thomas 

Leary testified to a number of practices that have come to the 

agency’s attention that may violate the FTC Act. For example, 

Commissioner Leary listed the following as concerns with some existing CCAs: 

• Misrepresentations about fees or ‘‘voluntary contributions.’’ 

• Promising great savings they often cannot deliver. 

• Abuse of non-profit status. 

• Failure to pay creditors in a timely manner or at all. 

• Failure to abide by telemarketing laws. 

• Noncompliance with the privacy and security requirements 

of the Gramm-Leach-Bliley Act, which restrains unauthorized use of personal financial information.207

On November 19, 2003, the FTC filed a complaint in Federal 

court against AmeriDebt, DebtWorks, Andris Pukke, and Pamela 

Pukke, and a second complaint against The Ballenger Group alleging these types of unfair and deceptive practices.208 The first complaint seeks to enjoin AmeriDebt, DebtWorks, and Mr. Pukke from 

making false and deceptive claims about the nature and costs of 

the services provided by AmeriDebt. That suit is ongoing. The FTC 

has settled the second case against Ballenger, which agreed to pay 

a $750,000 fine and change its practices, as described later in this 

Report. 

In addition to its joint efforts with the IRS to inform consumers 

of the deceptive practices of some CCAs, at the hearing, the Honorable Commissioner Thomas Leary told the Subcommittee: ‘‘the 

Commission is also currently conducting several non-public invesVerDate Aug 04 2004 02:47 Apr 15, 2005 Jkt 039010 PO 00000 Frm 00047 Fmt 6633 Sfmt 6601 E:\HR\OC\SR055.XXX SR055
44 

tigations of additional CCAs, debt negotiators, and related entities.’’ Most likely, such investigations will result in the FTC taking 

additional action against existing CCAs and their for-profit affiliates. 

(3) Pending Bankruptcy Legislation 

Another factor affecting Federal oversight of the credit counseling industry is the possibility that Congress may enact bankruptcy reform legislation requiring greater use of credit counseling. 

In the 108th Congress, for example, Section 106 of H.R. 975 would 

have amended Federal bankruptcy law to require that all consumers receive ‘‘an individual or group briefing . . . that outlined 

the opportunities for available credit counseling and assisted that 

individual in performing a related budget analysis.’’ The briefing 

would have to come from an approved non-profit budget and credit 

counseling agency within 180 days prior to filing a petition for 

bankruptcy. The bill would have also required debtors to complete 

‘‘an instructional course concerning personal financial management’’ after filing for bankruptcy under either Chapter 7 or Chapter 13. 

Moreover, the bill would have required the clerk of each bankruptcy district to maintain a public list of CCAs and instructional 

courses approved by the United States Bankruptcy Trustee or the 

bankruptcy administrator in the district. CCAs and instructional 

courses would have had to meet the following criteria: 

• Provide qualified counselors; 

• Maintain adequate provision for the safekeeping and payment of client funds; 

• Provide adequate counseling with respect to client credit 

problems; and 

• Deal responsibly and effectively with other matters as they 

relate to the quality, effectiveness, and financial security of 

counseling programs. 

Although the bill leaves these requirements to the Bankruptcy 

Trustee or the bankruptcy administrator for the individual districts 

to define, it does spell out certain minimum criteria. To be approved, a credit counseling agency must, among other requirements: 

• Be a non-profit agency; 

• Have a board of directors, the majority of which are not employed by the agency, and will not directly or indirectly benefit financially from the outcome of a credit counseling session; 

• Charge a ‘‘reasonable’’ fee and provide services without regard to the debtor’s ability to pay the fee; 

• Provide full disclosure to clients regarding funding sources, 

counselor qualifications, possible impact on credit reports, 

any costs that will be paid for by the debtor, and how such 

costs will be paid; 

45 

• Provide adequate counseling that includes an analysis of the 

debtor’s current situation, what brought them to that financial status, and how they can develop a plan to handle the 

problem without incurring negative amortization of their 

debts; and 

• Provide trained counselors who receive no commissions or 

bonuses based on the counseling session outcome and who 

have adequate experience and training. 

The bill also spelled out minimum requirements for instructional 

courses on personal financial management. These courses, among 

other requirements, would have had to: 

• Provide experienced and trained personnel; 

• Provide relevant learning materials and teaching methodologies; 

• Provide adequate facilities: instruction may occur over the 

telephone or the Internet if it is effective; and 

• Demonstrate after the probationary period that it has been 

or is likely to be effective in assisting ‘‘a substantial number 

of debtors’’ to understand personal financial management. 

The bill would have allowed CCAs and courses to be approved for 

a 6-month probationary period and for 1-year terms thereafter. The 

bill also would have allowed ‘‘interested parties’’ to seek judicial review of these approvals. The bill also would have allowed a district 

court to investigate any credit counseling agency and remove it 

from the list. 

VI. POST HEARING CHANGES IN THE INDUSTRY 

Since the Subcommittee’s hearing in March of 2004, a number of 

reforms have taken place throughout the credit counseling industry 

that may benefit consumers. Most notably, the three credit counseling agencies chronicled in this Report have undergone drastic 

changes ranging from bankruptcy to complete reorganization. The 

Internal Revenue Service has tightened its application process for 

Section 501(c)(3) status and heightened their scrutiny of current 

CCAs with tax-exempt status. Trade associations have tightened 

their member standards and educated their members on the current scrutiny and the need to comply with the requirements of Section 501(c)(3). Creditors have similarly tightened their standards 

for making fair share payments. The industry has a long way to 

go; however, with each improvement, consumers are one step closer 

to a service they can rely on. 

A. DebtWorks and The Ballenger Group 

Ballenger performed DMP processing for 11 non-profit CCAs, including AmeriDebt. Representatives of DebtWorks, Ballenger, and 

AmeriDebt were invited to testify at the Subcommittee’s hearing. 

Matthew Case, chief operating officer of AmeriDebt, testified on behalf of AmeriDebt. Andris Pukke who was subpoenaed to appear on 

behalf of DebtWorks, invoked his Fifth Amendment privilege to remain silent. Michael Malesardi, the chief financial officer for 

Ballenger, testified in his place on behalf of Ballenger. 

46 

209FTC v. AmeriDebt, Inc., et al., Case No. PJM 03cv3317, United States District Court for 

the District of Maryland; FTC v. The Ballenger Group, LLC, et al., United States District Court 

for the District of Maryland. 210 AmeriDebt letter to the Subcommittee, dated 8/23/04. In Re: AmeriDebt Inc., Case No. 04– 

23649–PM, In the District Court of Maryland, Greenbelt Division. 211 AmeriDebt letter to the Subcommittee, dated 8/23/04. 212 Id. at p. 2. 213 Report for Examination, Case No. 24–23649-PM, United States Bankruptcy Court, District 

of Maryland, Greenbelt Division, p. 1. 214 Id. 215 Id. at p. 3. 216 Id. 217 Id. 218 Id. at p. 7. 219 Id. 

At the time of the hearing, the FTC had filed complaints against 

AmeriDebt, DebtWorks, Andris Pukke, Pamela Pukke, and 

Ballenger.209 Currently, AmeriDebt’s action is still pending, while 

Ballenger settled with the FTC on November 19, 2003, agreeing to 

pay a $750,000 fine and change its business practices. 

(1) AmeriDebt Files for Chapter 11 Reorganization 

On June 5, 2004, AmeriDebt filed a petition for relief under the 

Chapter 11 reorganization provision of the Bankruptcy Code.210

Eight months earlier, AmeriDebt had stopped enrolling clients on 

DMPs.211 However, Federal and state enforcement actions have not 

been stayed by AmeriDebt’s bankruptcy petition.212 On June 24, 

2004, the U.S. Bankruptcy Court in Maryland directed the United 

States Trustee to appoint an Examiner for AmeriDebt in order to 

determine if a trustee should be appointed to manage AmeriDebt 

operations.213 The court ordered the Examiner to assess AmeriDebt’s financial status, assess AmeriDebt’s connection or relationship with Ballenger (including the officers, directors, and employees), and perform a preliminary preferences analysis.214 On August 

11, 2004 Raymond Peroutka, Jr. was appointed as the Bankruptcy 

Examiner in the matter. 

AmeriDebt currently manages 57,000 DMPs all serviced by 

Ballenger.215 The remaining nine employees at AmeriDebt provide 

‘‘credit counseling’’ to AmeriDebt’s existing clientele via the telephone. The service processing provided by Ballenger makes up 

AmeriDebt’s largest monthly expense. In the first 7 months of 

2004, AmeriDebt earned a net profit of approximately $1.5 million.216 Despite earning a net profit each month excluding May, the 

AmeriDebt management informed the Examiner’s staff they do not 

anticipate reorganizing and emerging from Chapter 11.217

In assessing AmeriDebt’s finances, the Examiner took issue with 

the transfer of AmeriDebt’s servicing rights to DebtWorks in 1999. 

The Examiner pointed out that AmeriDebt transferred to DebtWorks, for virtually no consideration, servicing rights that would 

generate $107 million in fees over the next 41⁄2 years.218 Using the 

January 2003 sale of 51% interest in the company owning the servicing rights and the profitability of the current owner of the servicing rights, Ballenger, the Examiner deduced that had this transfer been properly priced, AmeriDebt would have earned net profits 

for 2003 of $9.1 million.219 Even with such profitability, the Examiner noted the pending state and Federal suits against AmeriDebt 

seeking restitution as a concern. Most important of these suits is 

47 

220Order Approving Appointment of Trustee, Case No. 24–23649 PM, United States Bankruptcy Court, District of Maryland, Greenbelt Division, 9/20/04. 221Subcommittee interview with Ballenger representatives (9/29/04). 222The ‘‘at will’’ contract comes with two requirements: (1) from date of notice, Ballenger will 

process the CCA’s DMPs for 90 days and (2) the CCA must have a zero balance for their receivables with Ballenger or a ‘‘mutually agreeable plan’’ for resolving them. 

an IRS claim for $15 million in anticipation of a finding that 

AmeriDebt violated its Section 501(c)(3) status. Ultimately, the Examiner recommended appointing a trustee and on September 20, 

2004 the court approved Mark D. Taylor as trustee.220

On January 23, 2005 the Federal bankruptcy judge approved the 

sale of roughly 60,000 remaining accounts to Money Management 

International, a large Houston CCA. This sale paves the way for 

the eventual dissolution of AmeriDebt as a company. The judge had 

earlier determined that, given the number of suits pending against 

AmeriDebt, dissolution was the best option. 

(2) The Ballenger Group 

Since the Subcommittee’s hearing and the settlement of the FTC 

lawsuit, Ballenger has made a number of reforms to conform to the 

laws governing tax-exempt organizations and is also working as an 

advocate of for-profit CCAs. Among its reforms, Ballenger has 

modified its Fulfillment Agreement, changed its fee structure, and 

renegotiated its debt to Andris Pukke. 

Of the 11 CCAs that the Report described Ballenger as previously serving, only five currently have agreements with Ballenger 

for future DMP processing. Ballenger has executed Fulfillment 

Agreements with Debtscape, Debtserve, Fairstream, The Credit 

Network, and Visual Credit Counseling. According to Ballenger, it 

has made the following modifications to its Fulfillment Agreement 

with these CCAs: 221

(1) The agreement between Ballenger and each CCA is now an 

‘‘at will’’ contract. Either party may terminate the agreement at any time for any reason.222

(2) Ballenger has eliminated the right to transfer consumers’ 

DMPs from one CCA to another Ballenger CCA for any 

reason. 

(3) The rights to exclusive access to the CCAs’ consumer trust 

accounts (consumers’ monies designated for payment to 

creditors) have been eliminated. However, Ballenger maintains the right to access CCA escrow accounts in the event 

of non-payment. 

(4) An automatic fee increase of 3% annually was eliminated. 

(5) Ballenger’s right to market CCAs’ consumers for goods and 

services in exchange for a revenue sharing agreement with 

the CCA has been eliminated. 

(6) All non-competition and exclusivity clauses requiring the 

CCA to do business only with Ballenger have been removed. 

(7) A clause requiring each agency to comply with all rules 

and regulations issued by the IRS has been added. In particular, Ballenger requires each CCA to certify that all necVerDate Aug 04 2004 02:47 Apr 15, 2005 Jkt 039010 PO 00000 Frm 00051 Fmt 6633 Sfmt 6601 E:\HR\OC\SR055.XXX SR055
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223 Ballenger Fulfillment Agreement with The Credit Network executed September 1, 2004 ¶ 

2.10. 224Fair Market Value Evaluation prepared for The Ballenger Group, April–June 2004. 225 Available at www.responsiblecredit.com/index.php. See also, ‘‘New Debt Counseling Group 

Draws Fire; Doubts: A Consumer Advocacy Group is Accused of Being a Creature of the Growing Debt Counseling Industry,’’ The Baltimore Sun, July 21, 2004. 226 ‘‘Consumers for Responsible Credit Solutions Warns of a Future Bankruptcy Explosion if 

Most States or Congress Don’t Act to Change Current Credit Counseling Laws,’’ PR Newswire, 

August 26, 2004. 227 NCLC/CFA letter to Commissioner William C. Hiloman, dated 8/3/04. 228 Id. at p. 5. 

essary steps have been taken to comply with section 4958 

which guards against excess benefit to a third party.223

Ballenger has also reduced its fees to each CCA from $25/$30 per DMP per month (depending on electronic submission) to $16/$19 

per DMP. Ballenger has reduced the monthly fee by 10% on pre2003 DMPs. Such reductions make Ballenger’s fees competitive 

with the lowest in the industry.224

As the Report detailed, on October 2003 Andris Pukke sold the rights to service various CCAs to Ballenger for $43 million with an 

outstanding note to Pukke for $37 million. Ballenger has renegotiated this debt, settling with Andris Pukke for $500,000 plus another payment to Pukke of $250,000 for an agreement not to compete with Ballenger. 

At the same time it has reformed its practices, The Ballenger 

Group has recently started and funded a new group called the Coalition for Responsible Credit Solutions (‘‘CRCS’’). CRCS aggressively advocates the for-profit CCA model and has launched a wellfunded campaign to influence the pending language of a state 

model law regulating the credit counseling industry to allow forprofit CCAs. The CRCS criticizes the creditors and the NFCC and 

its CCAs, asserting that a CCA that accepts money from a creditor 

is working only for the creditor’s interests. 

The CRCS’s website includes a checklist for consumers on how 

to pick a CCA.225 This list suggests that face-to-face counseling is 

unnecessary and that a consumer should be able to get all needed 

education and counseling from the Internet. Additionally, CRCS 

suggests the IRS may revoke CCAs’ tax-exempt status for accepting 

fair share payments from creditors, leaving few financial options 

for debtors and causing ‘‘a bankruptcy explosion.’’ 226

For-profit CCA advocates have apparently convinced the National Conference of Commissioners on Uniform State Laws 

(‘‘NCCUSL’’) to incorporate a place for for-profit CCAs in their 

model law. As mentioned, the Consumer Federation of America and 

the National Consumer Law Center have also prepared a model 

law, which allows for-profit CCAs. However, in a letter to 

NCCUSL, the groups expressed reservations about the for-profit 

model’s ability to survive with the imposed fee limits they are suggesting.227 The CFA and NCLC maintain that they are neutral on 

the issue and have neither ‘‘endorsed’’ nor rejected the for-profit 

model.228 They also state: ‘‘We note with concern that some of the 

credit counseling entities that have been most aggressive in insisting that creditors and legislators endorse the for-profit model, like 

The Ballenger Group, are the very same companies who have been 

investigated, sued or sanctioned for deceptive acts by state and 

Federal regulators or lawmakers.’’ They go on to say, ‘‘In our opinVerDate Aug 04 2004 02:47 Apr 15, 2005 Jkt 039010 PO 00000 Frm 00052 Fmt 6633 Sfmt 6601 E:\HR\OC\SR055.XXX SR055
49 

229 Id. 230 Id. 231Second Addendum to Service Agreement between Amerix and American Financial Solutions, dated 4/12/04. 232 Id. 233 AFS letter to the Subcommittee, dated 8/31/04. 234Letter from AFS to Amerix, dated 5/5/04. 235 Id. 

ion, this means that their claims that the for-profit model would be 

the salvation of the credit counseling industry completely lack 

credibility.’’ 229 The CFA and NCLC support a non-profit presence 

as vital to the credit counseling industry and its future.230

B. The Ascend One-Amerix Conglomerate 

As the Subcommittee’s investigation proceeded, both AFS and 

Amerix notified the Subcommittee that each intended to modify its 

business practices. At the hearing, Cuba Craig, president and CEO 

of AFS, described the reforms that AFS had undertaken to conform 

to the letter and spirit of the law. It should be noted that AFS did 

not charge up front fees and had capped its monthly fees at $50 

per month even prior to the Subcommittee’s investigation. Criticisms of AFS operations were confined to its outsourcing and service agreement with Amerix. Cuba Craig testified, ‘‘Since the Subcommittee began its investigation, we have stepped up our efforts 

to ensure that AFS meets all applicable requirements.’’ 

To that end, AFS told the Subcommittee that it had implemented 

the following changes to its operations: 

(1) Origination, counseling, and all DMP enrollment are now 

done in- house.231

(2) The service agreement requirements to enroll 30% of all 

first time callers on DMPs (the ‘‘assist rate’’) and to generate $30 revenue per month in consumer fees for each 

DMP (the ‘‘revenue standard’’) were eliminated in April 

2004. 232

(3) AFS terminated both the FreedomPoint Strategic Marketing Agreement and the the FreedomPoint Mortgage 

Brokerage Prospect Lead Agreement on May 1, 2004, 

which meant that AFS was no longer required to make client referrals to these for-profit companies.233

(4) On May 5, 2004 AFS gave notice to Amerix that it would 

not renew the Amerix Benefits Package Marketing Agreement at the end of its initial term, and that AFS wished 

to cease marketing the Member Benefits Package. AFS was 

released from its marketing obligations in mid-August.234

(5) AFS solicited information about competitive bids for marketing services and conducted an analysis of the back office 

servicing in order to assess the fair market prices of such 

services. AFS issued a request for proposal for back office 

services in mid-September.235

50 

236 AFS letter to the Subcommittee, dated 8/31/04. 237 Id. 238 AFS received partial funding for the learning center from the Association of Independent 

Consumer Credit Counseling Agencies. 2004 AICCCA Consumer Education Grant 7/13/04. 239 AFS letter to the Subcommittee, dated 8/31/04. 240 Id. 241 Ascend One letter to the Subcommittee, dated 8/23/04. 242Second Addendum to Service Agreement between Amerix and American Financial Solutions, dated 4/12/04. 

(6) AFS scripts regarding voluntary contributions have been 

revised to ensure that consumers are clear that any contribution is voluntary. 236

(7) The AFS website has been changed to provide educational 

resources to all visitors, not just AFS clients. 237

(8) In August 2004, AFS opened a community learning center 

in the poorest neighborhood school in the Bremerton School 

District, near an AFS call center in Washington state. The 

Learning Center offers classes, tutoring, counseling and 

other financial and credit education to anyone who wishes 

to participate, free of charge.238 In addition, AFS has created an internship where the students work with the AFS 

Education Manager conducting surveys of the community 

to identify financial education needs.239

(9) In an effort to ensure that appropriate consumers are on 

DMPs, AFS has assigned three counselors to follow up with 

consumers who miss payments to determine whether the 

consumers should remain on the DMP and provide additional counseling if needed.240

Amerix, which provides debt servicing to CCAs in the conglomerate, has also made a number of significant changes in its operations. Bernaldo Dancel, president and CEO of Ascend One, the 

holding company of Amerix, said at the hearing, ‘‘We recognize that 

we can always do better, and this investigation has played quite a 

constructive role for our company in helping us.’’ Mr. Dancel noted, 

‘‘I think, frankly, the area where I believe there is particular room 

for improvement is in seeing the CCAs we serve offer good education and counseling to all consumers seeking assistance, whether 

they are suitable for a DMP or not.’’ Amerix told the Subcommittee 

that its reforms include the following: 

(1) Amerix has enlisted ‘‘Enhanced Standards’’ that will be required of every non-profit CCA wishing to do business with 

Amerix. Amerix told the Subcommittee that these enhanced standards include all of the requirements of 

AICCCA or NFCC membership, and require CCAs to conduct community outreach of 1,000 hours per year, perform 

individual client assessments regardless of whether clients 

choose to enroll in a DMP, prepare budgeting worksheets 

with tips for the client, and partner with an educational institution to increase educational offerings and consumer financial awareness.241

(2) Amerix ceased providing overflow origination services to 

American Financial Solutions on March 15, 2004 and determined not to provide such services to any other CCA.242

51 

243 Id. 244 Ascend One letter to the Subcommittee, dated 8/23/04; CESI Financial Counseling Session 

Guidelines and Disclosure Requirements; AFS Scripts. 245 Ascend One letter to the Subcommittee, dated 8/23/04; Ascend One, Concentration Account, 

bank statement March, 2004. 246 American Financial Solutions letter to the Subcommittee, dated 8/31/04. 247Profiteering in a Non-Profit Industry: Abusive Practices in the Credit Counseling Industry, 

March 24, 2004, Exhibit No. 18, p. 264. 248 Cambridge letter to the Subcommittee, dated 8/31/04. 249 Id. 

(3) Amerix eliminated any assist rate or revenue standard 

from its service agreement with its CCAs so there are no 

minimum DMP enrollment or monthly fee generation, as 

explained earlier with respect to AFS.243

(4) Amerix worked with its CCAs to review and modify all 

scripts used by counselors when assisting clients with credit counseling.244

(5) Ascend One has provided funding of $500,000 and pledged over $5 million over 10 years to the Ascend One fund for 

financial literacy. In addition, on July 21, 2004, Ascend 

One made a $24,000 grant to Junior Achievement to provide financial literacy education in the Baltimore City 

Schools, and another grant on July 28, 2004, of $50,000 

over a 5-year period to the Maryland Council on Economic 

Education.245

(6) Amerix also agreed to negotiate in good faith the fee structure for the services Amerix provides for AFS to reflect actual costs and the value of services provided.246

C. The Cambridge-Brighton Conglomerate 

Cambridge representatives were invited to testify at the Subcommittee’s hearing on March 24, 2004. Mr. Viale was invited to 

represent Cambridge, the non-profit CCA. Mr. Puccio was invited 

to represent the back office service provider for Cambridge and 

Brighton Debt Management. On the eve of the hearing Mr. Puccio 

informed the Subcommittee of health concerns that would prevent 

him from testifying. Mr. Viale attended the hearing and provided 

testimony on the CCA part of Cambridge’s operations. A deposition 

of Mr. Puccio took place on July 1, 2004 and is included in the 

hearing record.247

Since the Subcommittee hearing on March 24, 2004, Cambridge 

has taken steps to overhaul its entire corporate structure. Discussed below are changes that the Cambridge-Brighton conglomerate told the Subcommittee it was making to transition from a 

profit-driven group of companies to a system of operations driven 

by non-profit motives. 

Cambridge-Brighton told the Subcommittee that a new non-profit 

holding company will be created called ‘‘Cambridge Credit NonProfit Holding Company’’ that will function as the parent company.248 This company will be the sole owner of each non-profit 

CCA and the sole shareholder of two of the for-profit companies, 

Cambridge Index and Brighton Credit Management Corp.249 In addition, the for-profit service companies still wholly owned by John 

and Richard Puccio, Brighton DMS, Debt Relief Clearing House 

Ltd., and Cypress Advertising & Promotions, Inc. (‘‘the servicing 

52 

250 Id. 251 Id. 252 Id. 253 Id. 254 Id. 255 Id. 256 Id. 257 Id. 258 Id. 

companies’’), will become wholly owned subsidiaries of a new forprofit holding company called ‘‘Cambridge Credit For-Profit Holding Company,’’ whose stock will be wholly owned by the non-profit 

CCAs, Cambridge and Cambridge Budget Planning.250 As a result, 

Cambridge-Brighton told the Subcommittee that any and all profits 

of the servicing companies and the for-profit Cambridge Index and 

Brighton Credit, the for-profit CCA, will inure to the benefit of the 

non-profit CCAs and the non-profit holding company. 

The Subcommittee was also told that officers and employees of 

Cambridge will transfer the capitol stock of Brighton DMS, Debt 

Relief Clearing House, and Brighton Credit (the for-profit CCA) to 

the non-profit holding company.251 Pursuant to these changes, the 

non-profit CCAs will control through the non-profit holding company, Cambridge Credit Non-Profit Holding Company, 100% of the 

stock of each of the servicing companies. The non-profit holding 

company will also own all of the stock of the servicing companies 

and the for-profit CCA, Brighton Credit. Consequently, all profit 

generated by the for-profit companies will be in the control of and 

available for use by the non-profit companies. 

Cambridge-Brighton said that with the reorganization, the board 

of directors of the non-profit CCAs and the non-profit holding company will be expanded to include nine members, eight of whom will 

be independent directors who may not be officers, employees, or 

independent contractors of the non-profit CCAs or the non-profit 

holding company.252 For the for-profit companies, the governing 

board will consist of three directors, two of whom will be independent.253

Cambridge-Brighton told the Subcommittee that as of June 1, 

2004 all of its CCAs—Cambridge, Cambridge/Brighton Budget 

Planning, and Brighton Credit—had modified the fees charged to 

consumers for the construction and maintenance of the DMP.254

The maximum fee charged for initiating a DMP will be $75 and the 

maximum monthly fee for maintenance is $50 per month.255 Additionally, Cambridge has instituted a new refund policy allowing 

consumers to cancel the DMP at any time in the first 90 days of 

enrollment with a full refund available.256

Cambridge-Brighton told the Subcommittee that its CCAs have 

introduced a system called ‘‘post counseling’’ in which their counselors follow up with consumers placed on DMPs to ensure that 

they are utilizing the budgeting tools provided to track their finances. Three scheduled calls are supposed to be completed within 

the first 90 days of entering the DMP and the goal is to emphasize 

the need to develop savings. 257

For the community, Cambridge told the Subcommittee that it has committed $4 million over the next 3 years for the program 

‘‘Learn Now or Pay Later,’’ 258 working with high school students 

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259 Id. 260 Id. 261The United States Senate Finance Committee has circulated a Discussion Draft of proposals for reforms and best practices in the area of tax-exempt organizations. The Committee 

suggests a five-year review of tax exempt status by the IRS, including the filing of current articles of incorporation and by-laws, conflict of interest policies, evidence of accreditation, management policies regarding best practices, a detailed narrative about the organization’s practices, 

and financial statements. 

company credit. Students achieving excellence in the program will 

be awarded scholarships. Additionally, Cambridge works with a 

local Job Corp program to educate at-risk youths about the importance of responsible financial habits.259 Speaking engagements at 

local colleges and information booths at local shopping malls are 

also part of their community outreach.260

If implemented, these and other reforms should help resolve the 

abusive practices documented in this report. 

D. Recommendations 

Based upon its investigation of the credit counseling industry, 

the Subcommittee makes the following recommendations: 

(1) Complete Industry Cleanup. The IRS and FTC should 

complete their ongoing reviews of the credit counseling industry to eliminate abusive conduct by credit counseling 

agencies that have been operating in violation of restrictions on non-profit charities or using unfair or deceptive 

trade practices. 

(2) Establish Five-Year Review. In light of past industry 

abuses, the IRS should require each credit counseling agency exempt from Federal taxation under Section 503(c)(3) to 

submit every 5 years, for IRS review, return information 

establishing its charitable activities and a certification that 

the agency is not providing a private benefit to any individual or entity. The IRS should review these materials to 

ensure each credit counseling agency is operating as a 

charitable organization and in compliance with the law for 

non-profit entities. Congress should consider enacting legislation conditioning a credit counseling agency’s tax exemption on the submission of this documentation and the IRS’s 

renewal of its tax-exempt status for 5-year periods.261

(3) Provide Consumer Education. To address rising consumer debt and bankruptcy rates, each credit counseling 

agency should provide affirmative financial counseling and 

educational programs designed to reduce excessive indebtedness within the populations they serve, and should 

evaluate, improve, and document the effectiveness of these 

programs. 

(4) Continue Creditor Support and Standards. Major 

creditors should continue to provide financial support to 

appropriate, non-profit credit counseling agencies, conditioned upon the agencies’ achieving specified standards 

that contribute to the public good, including standards requiring agencies to maintain good standing and accreditation status within the industry, assess reasonable fees 

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seling to clients, and avoid conduct or transactions that 

generate or create the appearance of generating a private 

benefit for any individual or entity. Creditors should carefully screen credit counseling agencies to ensure they provide funds only to reputable agencies that comply with 

their standards. 

(5) Clarify Federal Standards. The IRS and FTC should 

work together to clarify the standards that credit counseling agencies must meet to maintain tax exempt status 

under Section 501(c)(3) and avoid deceptive or unfair trade 

practices, including by making it clear that a non-profit 

credit counseling agency must: 

(a) Accreditation—maintain good standing and accreditation status within the credit counseling industry, 

such as by meeting the accreditation standards of the 

Council on Accreditation for Children and Family Services; 

(b) Independent Board—maintain an independent 

Board of Directors that includes representatives of the 

community served by the agency and that includes no 

more than a minority of directors who are employed by 

the agency, a related entity, or any other person who 

stands to gain direct or indirect financial benefit from 

the agency’s activities; 

(c) Public, Not Private Benefit—avoid conduct or transactions that generate or create the appearance of generating a private benefit for any individual or entity; 

(d) Full Disclosure—disclose to each client the existence 

and nature of any financial relationship that the agency has with a creditor of the consumer or with a forprofit entity that provides data processing, marketing, 

or financial services to the agency or the client; 

(e) Reasonable Fees—assess clients reasonable fees that 

are based upon the agency’s actual costs and charged 

as services are provided, rather than substantially in 

advance of such services; and 

(f) No Improper Incentives—refrain from accepting 

compensation for referring clients to any service or organization, and refrain from paying compensation to 

any employee based upon the number of clients enrolled in debt management plans or the amount of client debt managed by the agency. 

Æ