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Debt Relief

At a time when consumers are required, sophomorically, to see a credit counseling agency before filing personal bankruptcy, the IRS is quietly squashing out the industry. The IRS this week bragged that it audited 41 credit counseling agencies and that all of the completed audits have resulted in revocation, proposed revocation or other termination of tax-exempt status. The IRS further noted that since 2003, about 100 tax-exempt applications from credit counseling firms have been reviewed but only three have been approved. The IRS says it is now targeting 740 known tax-exempt credit counseling agencies for audits. In another development, the Connecticut Bar Association and the National Association of Consumer Bankruptcy Attorneys have filed suit in federal court challenging several key provisions of the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.” The CBA says the new law creates requirements for “debt relief agencies” that prohibit lawful legal advice. The U.S. Justice Department has taken the position that attorneys are “debt relief agencies.” The CBA asserts that these provisions impair the constitutional rights of attorneys and their clients under the First and Fifth Amendments to the Constitution. The Attorneys’ Group says some attorneys are being deterred from representing any individuals in bankruptcy, even pro bono, because they are afraid of being classified as “debt relief agencies.” In other cases, attorneys will not even talk to clients on the telephone for fear of violating these provisions or feel they are restricted in giving legal advice.

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