Internal Revenue Code Section 501(q) and Credit Counseling Agencies: An Overview

How 501(q) Relates to Existing IRS Requirements for 501(c)(3) Organizations

In addition to meeting all current legal requirements contained in Section 501(c)(3), a credit counseling agency desiring tax-exempt status under Section 501(c)(3) also must adhere to the rules contained in Section 501(q), enacted into law in 2006. If 501(q) applies to your credit counseling agency, then any violation of any 501(q)’s requirements and prohibitions may result in loss of your 501(c)(3) tax-exempt status.

“Credit Counseling Services” Defined

Section 501(q) is generally applicable to all organizations exempt under Sections 501(c)(3) or (4) that provide “credit counseling services” as a “substantial purpose” of their organization. “Credit counseling services” are defined as (i) the providing of educational information to the general public on budgeting, personal finance, financial literacy, saving and spending practices, and the sound use of consumer credit, (ii) the assisting of individuals and families with financial problems by providing them with counseling, or (iii) a combination of the above. The first published IRS guidance regarding 501(q) (in 2010) concluded that organizations that provide educational information on financial topics (or provide financial counseling to homeowners who are at risk of foreclosure) are providing “credit counseling services” within the meaning of 501(q). An organization that engages in such activities as a “substantial purpose” must comply with 501(q) or risk losing its 501(c)(3) tax-exempt status.

501(q)’s Requirements and Prohibitions

Services Tailored to Consumers

You must provide credit counseling services tailored to the specific needs and circumstances of each consumer.


You may not make loans to debtors (other than loans with no fees or interest) and you may not negotiate the making of loans on behalf of debtors.

Credit Repair

You may only provide incidental services to improve consumer credit records and credit history, and you may not charge a separate fee for such services.

Ability to Pay

You may not refuse services based on inability to pay, or on the ineligibility or unwillingness of a consumer to enroll in a debt management plan.

Fee Policy

You may charge reasonable fees, but must provide waivers if a consumer is unable to pay; also, except to the extent allowed by state law, you may not charge fees based on the percentage of the consumer’s debt, the consumer’s debt management plan payments, or the savings to the consumer from the debt management plan.

Board Composition

The majority of your board of directors must represent the broad interests of the public, such as public officials, community leaders, and persons having special knowledge or expertise in credit or financial education. No more than 49% of the board may be employees of the agency, creditors or others who will benefit financially (directly or indirectly) from the agency’s activities (other than through reasonable directors’ fees), and no more than 20% of the board may be employees of the agency or others who will benefit financially (directly or indirectly) from the agency’s activities (other than through reasonable directors’ fees or the repayment of consumer debt to creditors).

Ownership/Control of Other Entities

You may not own more than a 35% interest in a non-501(c)(3) tax-exempt entity that is in the business of lending money, repairing credit, or providing debt management plan services, payment processing, or similar services.


You may not pay for obtaining referrals of consumers (for any purpose), and you may not receive compensation for providing referrals to others for debt management plan services. Note that the legislative history makes clear that if a credit counseling agency pays or receives a fee for using or maintaining a locator service for consumers to find a credit counseling agency, this is not considered a referral.

Soliciting Contributions

You may not solicit contributions during the initial counseling process or while the consumer is receiving services from you.

Limitation on Revenues from Creditors

Section 501(q) limits revenues from creditors (e.g., banks, mortgage servicers) that are attributable to “debt management plan services.” Such payments from creditors cannot exceed 50% of your total revenues.

“Debt Management Plan Services” Defined

“Debt management plan services” are defined as services related to the repayment, consolidation or restructuring of a consumer’s debt, and includes the negotiation with creditors of lower interest rates, the waiver or reduction of fees, and the marketing and processing of debt management plans.

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For more information, contact Mr. Tenenbaum at