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How Nonprofit Debt Consolidation Works

If you’re trying to pay off credit card debt but are having trouble doing it yourself, you might want to consider nonprofit debt consolidation.

Non-profit debt relief companies work with your credit card issuers to lower interest rates on your credit cards, resulting in lower monthly payments until your debt is paid off . You’ll have one payment each month rather than having to make multiple credit card payments, but you’ll have to give up using your credit cards during that time.

Here are some things to consider to help you determine if free debt consolidation is right for you.

What is Nonprofit Debt Consolidation?

When you undertake nonprofit debt relief, a financial advisor from a nonprofit debt consolidation company will work with you to put together a debt management plan that best suits your budget. Your advisor will negotiate with credit card companies to lower the interest rates you pay on your credit cards.

As part of your new debt management plan, rather than continuing to pay your credit card companies directly, you will typically make a payment each month to the nonprofit debt consolidation company. The company uses this money to pay your creditors.

“Nonprofit debt consolidation can be a good option for those who feel overwhelmed with multiple payments with different due dates to remember,” says Katie Ross, the nonprofit’s executive vice president. American Consumer Credit Counseling. “With debt consolidation, you make a monthly payment on the day of the month that suits you best.”

Plus, because of the lower interest rate on your credit cards negotiated on your behalf, you’ll pay off debt faster, have more affordable monthly payments, and pay less interest overall. The repayment process can take two to five years.

You’ll also need to agree to close your credit cards so you don’t go into further debt. But you may be able to keep a credit card for emergencies.

Unlike other methods you might consider if you want to pay off debt, such as taking advantage of a 0% credit card balance transfer or taking out a personal loan, with nonprofit debt consolidation, you won’t don’t need to take out a new loan to pay off the debt.

Types of Debt Repaid by Nonprofit Debt Consolidation Companies

Non-profit debt management companies focus on assisting with unsecured debt, most commonly credit card debt. But they can also help settle other unsecured debt, including student loans and medical debt.

When it comes to student loan assistance, nonprofit debt management companies typically help clients explore their options, Ross says. “These options may include loan forgiveness, consolidation, or income-driven repayment plans. Options will vary depending on whether the client has federal or private student loans, as federal student loans have different types of repayment plans. .

For those with medical debt, nonprofit debt management counselors can help you analyze your financial situation and work out a variety of personalized options to resolve the debt, including providing referrals from social services, financial management resources and the opportunity to enroll in a debt management program.

Why work with a non-profit debt consolidation company?

Non-profit debt relief companies do not seek to make a profit when they help you. Indeed, much of their funding comes from grants from individuals and foundations. They also receive voluntary contributions from creditors. The purpose of these agencies is to help you improve your financial situation.

“Nonprofit credit counseling agencies are dedicated to helping consumers overcome debt, make better financial decisions, and save for the future,” says Amy Maliga, financial educator for Take Charge America. “Nonprofit credit counselors receive extensive initial and ongoing training to ensure they are able to help people facing a variety of financial challenges.”

However, these companies charge a fee that is used to cover their expenses. Bruce McClary, senior vice president of communications for the National Foundation for Credit Counseling (NFCC) — the nation’s oldest and largest nonprofit consumer credit counseling agency — says the fees for setting up credit A debt management plan should generally be $50 or less, and monthly fees vary depending on a range of factors, including the amount of debt listed, but should average between $25 and $35. However, if you are in serious financial difficulty, you will not be charged a fee.

Fees vary depending on state laws and the nonprofit debt relief company you choose.

What to Look for in a Nonprofit Debt Consolidation Company

When choosing a non-profit debt relief company, look for one that has received accreditation from an independent body.

NFCC member companies must be accredited by the Council on Accreditation (COA), an independent organization that accredits more than 1,600 social service organizations in the United States and Canada. NFCC financial advisors have been trained and certified.

You can also check the rating of a nonprofit debt relief company with the Better Business Bureau.

“As with any financial institution, consumers should do their research before choosing to work with a nonprofit credit counseling agency. They should seek longevity in the industry,” says Maliga of Take Charge America.

Consumer reviews on sites like TrustPilot can also be helpful when selecting an agency. You may also want to examine the company’s social media presence to see if it’s actively engaged in providing financial education, Maliga says.

Non-Profit Debt Consolidation vs For-Profit Debt Relief

Non-profit credit counseling agencies and for-profit debt relief companies differ in many ways. Specifically, because nonprofit credit counseling agencies receive financial support from other sources, their services are free or inexpensive. Also, a nonprofit debt consolidation agency will usually provide free educational materials to help with various aspects of financial planning, including budgeting and planning for college or retirement.

For-profit debt settlement companies seek to make a profit when they help you. Additionally, they generally do not provide any type of ongoing financial education to their clients. Here are some of the most important differences between the two types of businesses to keep in mind.

Non-Profit Debt Consolidation

With nonprofit debt consolidation, your financial advisor will work with your credit card companies to lower interest rates on your debt, and you will continue to make regular monthly payments to the nonprofit debt consolidation company. nonprofit, which then forwards the money to your credit. card companies. This means that you always make payments on time and reduce your debt each month, which will help improve your credit.

In contrast, a for-profit debt relief company will tell you to stop paying your bills and put money in an escrow account. When the balance is high enough, the company will attempt to negotiate a debt relief plan with your creditors. But not paying your creditors can cause various problems.

“Failing to pay your creditors will result in collections, additional late fees, and possibly legal action,” says Ross of American Consumer Credit Counseling.

Also, there is no guarantee that your creditors will accept the debt relief deal that the for-profit debt relief company ultimately tries to negotiate. If the settlement is rejected, you will have even more financial problems.

Even if the suggested settlement for the for-profit debt relief company is accepted, your credit score will take a big hit because you haven’t paid your bills.

With nonprofit debt consolidation, your credit score may drop because you had to close your credit cards, but it won’t have the same negative impact as not paying your bills.

For-profit debt relief

The goal of a for-profit debt relief company is to make money, and the companies may try to sell you products or services.

The Federal Trade Commission outlines these for-profit debt relief companies, who will usually try to work out a debt settlement plan with your creditors. This means that the company will try to negotiate with your credit card companies to reduce the amount you owe.

A major disadvantage of for-profit debt relief companies is that they force you to stop paying your creditors. Instead, you deposit money monthly into an escrow-type account, and when the balance reaches a certain amount, the company will try to reach a settlement with your credit card companies. Part of your money goes to the for-profit business.

Chances are your accounts will be flagged as overdue during this time.

The bottom line

A for-profit debt relief company may claim to settle your debts for a fraction of what you owe, but there is no guarantee that your creditors will accept the company’s proposed settlement. Because you won’t pay your bills for months, your debts keep growing and you could face endless calls from your credit card companies.

On the other hand, if you work with a non-profit debt consolidation company, your debt will be gradually paid off over time at a lower interest rate, and your credit rating will not suffer major consequences. You’ll also avoid calls from bill collection agencies and costly late fees.