Would you be able to pay off your credit card debt, if creditors forgive 40% to 50% of your debt? And agreed to those numbers up front without negotiating? And gave you three years to pay it all off at 0% interest with no penalty if you pay it off early?
That is the very enticing offer being made to delinquent credit card holders through a new debt-relief program called “Nonprofit Debt Settlement.” The program is offered by nonprofit credit counseling agencies, some of whom may call it “Less Than Full Balance”.
By either name, it could be a financial lifesaver for cardholders who have fallen so far behind in payments that they are drowning in credit card debt. Nonprofit Debt Settlement could be the solution that gets them back on their feet financially at a repayment rate they can afford.
“We’re giving consumers who have defaulted on credit cards the option of letting us reach out to their creditors and propose a solution they can afford,” said Mostafa Imakhchachen, who supervises the Less Than Full Balance Program at InCharge Debt Solutions.
“They can spread out their payments over 36 months instead of having to come up with one, huge lump-sum payment. The goal is to at least pay off some of he balance owed, rather than just letting a debt sit there unpaid.”
The program, which was developed by the National Foundation for Credit Counseling, is in its infant stages. While some of the major credit companies have agreed to participate – Chase, Bank of America, Wells Fargo, Synchrony, Portfolio Recovery, TD Bank and Resurgent Capital – not all credit card companies have signed on.
You must check with the nonprofit credit counseling agency you work with to ensure that your card company is included.
What Is Nonprofit Debt Settlement?
Nonprofit Debt Settlement is a debt-relief program that allows consumers to eliminate credit card debt by paying less than what they owe – typically 40%-50% less — over a 36-month time period.
Nonprofit Debt Settlement has four distinct advantages over traditional debt settlement and bankruptcy:
- In Nonprofit Debt Settlement, the creditor agrees upfront to accept less than what is owed. There is no negotiating.
- In Nonprofit Debt Settlement, the payments are spread evenly across 36 months. You’re not expected to make a single lump-sum payment.
- There is no interest charged on the monthly payments in Nonprofit Debt Settlement.
- Nonprofit Debt Settlement stops debt collectors from harassing you for payment and prevents the threat of a lawsuit to try collecting the debt.
“Being hounded by debt collectors – and possibly facing litigation of the case goes to court – is a real headache,” Imakhchachen said. “With our program, you are telling the creditor ‘I can’t pay the full amount, but I will pay what I can afford.’
“Future lenders are more apt to look kindly on borrowers who tried to repay some of their debt than those who simply ignored it.”
How Nonprofit Debt Settlement Works
Nonprofit Debt Settlement is a five-step program that combines parts of a debt management program with bits of a debt settlement program. The goal is to match the borrower’s desire to get out of credit card debt with the lender’s desire to recoup at least some of its money.
Here is how the program works:
Step 1: Credit Counseling
The first step is a phone call to a nonprofit credit counseling agency to analyze your financial situation and determine if this is the best debt-relief option for you. Certified credit counselors will review your budget to see if there is way for you to balance income and expenses so that you can pay off your debt.
Step 2: Qualifying for Nonprofit Debt Settlement
The starting point to qualify for a Nonprofit Debt Settlement program is that you have not paid on your account in 180 days. Typically, at that point, card companies will “charge off” your account, meaning they write it off as a loss, close the account and sell it to a collection agency for pennies on the dollar. However, the nonprofit credit counseling agency can call the card company on your behalf, ask if they will agree to participate in the Nonprofit Debt Settlement program and accept an offer to settle the debt.
Step 3: Agreeing to the Terms
If the card company agrees to participate, the counselor sends a proposal that reflects the payment amount the consumer can afford on a monthly basis and what percentage of the debt would be forgiven. The monthly payment will include a service fee for the nonprofit credit counseling agency that manages the account, but no interest charges are added.
Step 4: Making Monthly Payments
If the card company accepts the proposal, the consumer is obligated to make on-time monthly payments in the agreed upon amount. If the consumer misses a payment, the agreement is voided and the consumer will owe the full balance, minus what they paid so far.
Step 5: Remainder of Your Balance is Forgiven
If the consumer makes 36 on-time payments, the agreed upon amount is forgiven. The consumer can pay off the balance early, but there is no extension available beyond 36 months. The full balance due must be accounted for in 36 months.
“We stress to every consumer that this is not a program you can miss payments on,” Imakhchachen said. “We are very clear that you must make every payment on time, or the agreement will be voided.
“And if you happen to come into a windfall somewhere along the way and can pay off the balance … great! Do it and call it a day.”
Eligibility for Nonprofit Debt Settlement
A cardholder must be in default status on credit card debt – no payment for 180 days – in order to be eligible for Nonprofit Debt Settlement.
Beyond that, the cardholder must have a sufficient income to afford 36 monthly payments agreed to by the creditor.
Nonprofit vs For Profit Debt Settlement
Though the goal for Nonprofit Debt Settlement and for-profit debt settlement are the same – paying less than what is owed to settle a debt – that is one of the few things they have in common. The routes getting to the goal are glaringly different.
In Nonprofit Debt Settlement, the consumer’s offer to settle the debt at a certain amount is accepted or rejected by the creditor from the start. If accepted, the consumer knows from the start how long it will take to pay off the balance how much money he/she will save by doing so. Consumers make fixed payments for 36 months – no longer! – and the debt is eliminated.
By contrast, the for-profit debt settlement program typically spends two years – most times longer — negotiating a lump-sum payment amount to settle the debt. During that time, the consumer is asked to make regular payments into an escrow account to build a suitable lump-sum payment amount.
The consumer also is asked to stop making payments to creditors. In the meantime, late payment penalties and interest combine to make the balance on the debt grow every month, thus erasing much of the gain made during settlement negotiations. By the time the consumer pays off what is owed, the amount saved could be considerably less than the 40%-50% amount envisioned at the start.
One more similarity worth mentioning is that all forms of debt settlement are scored negatively by credit score models. For-profit debt settlement is considered slightly more negative because of the late payments. Both remain on your credit report for seven years.
The differences between Nonprofit Debt Settlement and for-profit debt settlement?
- In Nonprofit Debt Settlement, the agreement to waive 40%-50% of the amount owed is reached at the start. In for-profit, the deal is negotiated, typically over 2-3 years.
- Nonprofit is paid off in monthly payments over a 36-month period. For-profit is a lump sum amount due when an agreement is reached.
- In Nonprofit, no interest is charged on the balance owed. In for-profit, interest charges and late payment penalties accrue until an agreement is reached.
- Debt collectors can’t contact someone participating in a Nonprofit Debt Settlement program.
Why Use a Nonprofit Credit Counseling Agency for Debt Settlement
The chief selling point for the nonprofit sector is that it is judged not by its bottom line, but by whether it succeeds in providing a public service.
If it doesn’t, its status as a nonprofit – and the business/tax advantages that go with that – are at risk with the Internal Revenue Service, which regulates nonprofits.
As it regards debt-relief programs, nonprofits must provide an option that best meets the financial needs and goals of the consumer. Their reputation is based on honest and trustworthiness.
By contrast, the goal of for-profit companies, as the name suggests, is to make a profit for providing their services. That may or may not be in tune with the consumer’s needs and goals.
Consider Your Options
When you have fallen dangerously behind with credit card debt, it is tempting to grab the first relief option available and hope it will work out.
Don’t waste time hoping.
As suggested above, start looking for a solution by contacting a nonprofit credit counseling agency. Their counselors are required by law to find the safest, most affordable solution to your financial problems. If that solution is Nonprofit Debt Settlement program … good!
If one of the traditional forms of debt relief – debt management, debt consolidation, debt settlement or bankruptcy – better suit your circumstances, the nonprofit credit counselors are required to advise you of that.
Personal finances vary so dramatically from one household to the next that it’s senseless to pick one solution and say it applies successfully to everyone. Look at each option closely. Weigh the positives and negatives between programs. Ask credit counselors questions and listen closely to their advice.
About The Author
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].