When you’re struggling every month to reduce credit card debt, it’s easy to grab at any solution that promises to ease the pain.
Slow down. There is a whole industry designed to relieve that problem. It’s called nonprofit debt consolidation and the keyword there is nonprofit.
That is a status given to nonprofit debt consolidation companies by the federal government and it means they operate under a different set of rules and standards. Stricter rules and higher standards. If they don’t follow those rules and standards, they lose the nonprofit status and the tax benefits that go with it.
Also, understand that nonprofit debt consolidation companies deal almost exclusively with credit card debt. They don’t make loans so there aren’t programs to refinance a home, auto or student loans.
Still, it’s worth taking the time to recognize what makes a nonprofit debt consolidation company better at helping solve debt problems; how nonprofits work, how they can help your cause and why they’re different than for-profit companies.
What Is Nonprofit Debt Consolidation?
Nonprofit agencies give you a free credit counseling session, then offer options on solving your financial problems.
It really is that simple. They listen to your financial problems, help you develop a budget and then offer you options to eliminate your debt.
The counselors at nonprofit agencies are certified and trained in consumer credit, money and debt management, and budgeting. In the initial counseling session, typically lasting 25-30 minutes, your entire financial situation will be discussed, and a personalized plan will be developed.
Reputable agencies will send you free information about themselves and the services they provide without requiring you to provide any details about your situation. If a firm won’t do that, it’s a red flag. Move on.
If you qualify for a debt management program — not everyone does — nonprofits offer that service. It will help you work on your budget and curb your spending habits.
It could be that you’re better served with a debt settlement plan or debt consolidation loan. If you’re in deep enough trouble where there doesn’t seem to be a way out, bankruptcy could be recommended.
In a debt management program, nonprofit debt consolidation companies take your unsecured debts (i.e. credit cards) and merge them into one. They also work with the credit card companies to lower the interest rate on your bills to around 8%, sometimes even lower.
The result is an affordable monthly payment that helps you get out of debt faster. Best of all, this is not a loan. You are not taking on another payment that only adds to your debt problems.
During your session, you will be trained to identify the cause of your financial problems and a budget will be developed to maximize your savings. The counselor will provide a debt relief solution that best deals with your personal situation — and debt management is one of those potential solutions.
Standards for Nonprofits
The old saying that you can be judged by the company you keep, really applies in the case of debt consolidation companies.
The top nonprofit debt consolidation companies belong to the National Foundation for Credit Counseling (NFCC), the oldest and largest organization for financial counseling in the U.S.
NFCC members agree to follow the organization’s mission of promoting financially responsible behavior by not just providing counseling services, but also educating consumers on all matters of personal finance. NFCC member organizations train and certify credit counselors in areas as diverse as debt management plans, home buying, student loans and even bankruptcy.
Every NFCC member must obtain accreditation from the Council on Accreditation (COA), an independent third-party organization that has reviewed more than 1,500 social service programs around the world.
NFCC members must subscribe to the COA’s best practices standards, which include:
- An annual audit of its operating and trust accounts.
- Being licensed, bonded and insured.
- Supporting and delivering a variety of consumer education programs.
- Meeting all consumer disclosure requirements as set forth by the Federal Trade Commission.
- Making services available to the public, regardless of their ability to pay.
All NFCC agencies must be re-accredited by the COA every four years. In addition, all member agencies must comply with the NFCC’s Member Quality Standards guidelines, which guarantee their ability to provide quality education and assistance to consumers.
Nonprofit vs. For-Profit Debt Consolidation Companies
There are distinct differences when you choose a nonprofit debt consolidation company instead of those whose solution is debt settlement.
It’s all about the bottom line. Are they serving YOUR bottom line? Or THEIRS?
Nonprofit debt relief companies offer solutions that are best for your situation, not driven by a sales commission or profit motive. The for-profit companies are sometimes criticized for offering products, services and advice that are best for the company’s bottom line instead of the client’s best interests.
Here’s how to tell the difference between a nonprofit debt relief company and another debt relief company:
- The NFCC affiliation. Always look for that. NFCC member organizations are all 501(c)(3) nonprofit debt relief companies.
- You shouldn’t be charged up-front fees. The Telemarketing Sales Rule for Debt Relief Companies stipulates that no debt relief company can charge up-front fees before providing a service. Nonprofits have minimum set-up charge and monthly fees for their debt management program, but those typically are much less expensive than the fees for debt settlement. Beware of any company that has high fees, vague fees or insists upon voluntary fees beyond your means. Those are red flags.
- Check with the Better Business Bureau. Are there complaints against your debt relief company? How have they been resolved? Complaints could range from poor customer service to false advertising to improper billing practices.
- Check with the state attorney general and/or consumer protection bureau. Make sure the debt relief company is licensed in your state. Ask if there are actions or ongoing investigations involving the company.
- Nonprofit debt relief companies should offer you a 100% free budget analysis. That means thorough credit counseling and budget counseling is free. Accept no less.
- If you’re being offered guarantees to settle your debt for pennies on the dollar, hearing aggressive sales pitches or being promised “quick fix’’ solutions … run! These are huge red flags.
Debt management is efficient, educational and will get you on the right track to eliminate credit card debt. Debt settlement creates a hit on your credit score; is a gamble because creditors are under no obligation to help you or accepts your offer; and the amount you save is unknown until a settlement is reached.
It took you a while to get into debt. It will take a while to escape, usually 3-5 years. A nonprofit debt consolidation firm doesn’t have magic cures, but relies on discipline and fundamentals that allow you to erase your debt and avoid future financial blunders.
Here are the cornerstones of the best nonprofit debt consolidation companies and debt management programs:
- Credit bills are consolidated into one easy monthly payment.
- Interest rates are reduced, regardless of credit score.
- Can pay off your debt faster (most clients are debt free in 3-5years).
- Collection calls are halted.
- Late fees and over-limit charges on credit cards are eliminated.
- You will be presented a realistic budget and financial plan.
- A monthly fee (usually $25-$50) is charged for handling and maintaining your account. If you don’t have income to afford the fee, it’s possible it will be waived.
- Be aware that with many agencies, the first month’s payment will go to the debt consolidation firm (not your creditors).
- Monthly payments are automatically debited from your checking account.
- All forms of transparency are provided. That could include the listing of all fees, clarity on the program’s time frame, eligibility rules and customer service.
Debt management is a more sound approach for eliminating debt than utilizing a company that pushes for debt settlement. Typically, debt settlement requires that you make payments to the company (not your creditors) until a stockpile of money is saved. Then the company contacts your creditors and tries to negotiate a settlement in which you pay less than you owe.
If your creditors agree, you pay a portion of your original debt, plus a fee or percentage to the settlement company. The net gain for you usually is a reduction of 15%-25% of debt and your credit score takes a severe beating for seven years. The fact you didn’t make full payment will make it extremely difficult to get credit again.
What to Look for in a Nonprofit Debt Relief Company
When determining the ideal debt consolidation company for your needs, there are some tell-tale qualities that should define the decision.
Nonprofits have a series of guidelines and rules that must be followed in order to maintain 501 (c)(3) nonprofit status:
- Its activities should not serve the private interests or benefit people such as board members, officers, directors or employees.
- Its lobbying — advocating the adoption or rejection of political legislation — must be tempered. And the organization can’t participate in political campaigns.
- It can’t earn excess unrelated business income (UBI), which comes from trade or business that is not substantially related to the organization’s exempt purpose.
- Although exempt from federal income tax, nonprofits must report certain information annually, according to the Internal Revenue Code.
- Simply put, the organization must pursue the exempt activities it promised in its IRS application for exemption.
What to Consider about Debt Relief Companies?
If you’re in deep debt, you’re probably desperate to escape. And that makes you a target for the non-reputable scammers in the debt relief industry.
Not all debt relief programs are built the same. Finding a trustworthy one in the first place, can be a difficult task in itself.
Look out for the fees companies charge and if it would even be worth your time to enter into an agreement with the business.
There are two major downfalls with debt relief companies. Many for-profit debt relief companies encourage you to not pay your credit card bills. This in turn will harm your credit score and make it harder to get out of debt. The second downfall is although companies claim their clients have paid 40-50% less than what they owed, that is in the past. Results are not guaranteed to carry over client to client.
A nonprofit credit counselor is the safest option for eliminating credit card debt.
Consider Your Options
Nonprofit debt consolidation involves consolidating your debt with a credit counselor. Once you have reached an agreement on the debt management plan, you then pay the agency monthly until the debt is settled. Nonprofit companies are usually the most reliable because they aren’t meant to make money unlike a for-profit. However be aware they do charge small fees between $25-$50 a month to handle your case.
Make sure to do your research before deciding on one company. Are they an accredited agency? What is their Better Business Bureau Rating? Do you have friend who can vouch for their services? Try to answer those questions and see if the debt consolidation company is right for you.
So, what is the best option? The simple answer is to stick with a nonprofit credit counselor. Steer clear of for-profit debt relief companies. They can often make the problem worse. There is a reason they make a profit. Take control of your finances and you can be well on your way to becoming debt free.
About The Author
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it seven years ago, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering college and professional sports, which are the fantasy worlds of finance. His work has been published by the Associated Press, New York Times, Washington Post, Chicago Tribune, Sports Illustrated and Sporting News, among others. His interest in sports has waned some, but his interest in never reaching for his wallet is as passionate as ever. Bill can be reached at firstname.lastname@example.org.
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