When you’re struggling every month to make progress on reducing 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.
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 the ability to pay.
All National Foundation for Credit Counseling (NFCC) agencies must be re-accredited by the COA every four years. In addition, all member agencies must comply with NFCC’s Member Quality Standards guidelines, which guarantee their ability to provide quality education and assistance to consumers.
What is nonprofit debt consolidation?
Nonprofit agencies give you a free credit counseling session, then offer options on solving your problem.
It really is that simple. 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 an hour, 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. Or 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 8%-9%, sometimes even lower.
The result is an affordable monthly payment that helps you get out of debt faster. Best of all, you can accomplish this without having to take out a new loan 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.
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.
Other companies are looking out for THEIR bottom line more than YOUR bottom line.
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.
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 on behalf of candidates running for office.
- 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 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.
Here are the cornerstones of the best nonprofit debt consolidation companies and debt management programs:
- Credit bills are consolidated into one easy monthly payment.
- You can pay off your debt faster (most clients are debt free with three to five years).
- Interest rates are reduced, regardless of credit score.
- Collection calls are halted.
- Late fees and over-limit charges are eliminated.
- You will be presented a realistic budget and financial plan that you can follow.
- A monthly fee ($25-$50) for handling and maintaining your account. If you don’t have income to afford the fee, it’s possible they will be waived by a reputable credit counseling agency (you probably must fall below a prescribed income line to have all fees 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. 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 company. The net gain for you usually is a reduction of 15%-25% of debt and your credit score takes a severe beating. The fact you didn’t make full payment will make it extremely difficult to get credit again.
What to consider and what to look out for
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. Around every corner, there’s a company that could take advantage of your situation.
Here’s how to tell the difference between a nonprofit debt relief company and another debt relief company.
- The National Foundation for Credit Counseling 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 offering 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 numerous 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 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.
One of the biggest distinctions is working with a debt consolidation company that offers a debt management plan and a debt consolidation company that pushes for a debt settlement arrangement.
Debt management is efficient, educational and will get you on the right track. Debt settlement creates a hit on your credit score. It’s also a gamble. Creditors are under no obligation to help you.
It took you a while to get into debt. It will take a while to escape, most of the time between three to five 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 help avoid future financial blunders.