Key takeaways

  • Traditional debt consolidation involves rolling your unsecured debts into a new loan, but nonprofit debt consolidation requires you to enroll in a debt management plan.
  • Nonprofit debt consolidation can be used to make credit card debt and medical debt more manageable.
  • Student loans are ineligible for debt management plans, but the credit counselor may be able to help you explore your options to make the monthly payment more affordable.

Debt consolidation involves rolling all your unsecured debts into a single loan. You’ll get one monthly payment, making it easier to manage your debt load. It’s also possible to get out of debt sooner if you qualify for better terms than you currently have.

Nonprofit debt consolidation is different from traditional debt consolidation. Instead of taking out a loan or credit card on your own to combine your balances, you work with a nonprofit debt consolidation company to set up a debt management plan that is more feasible for your budget. Plus, you’ll likely have to give up using your credit cards while enrolled in the plan.

How nonprofit debt consolidation works

When you hire a nonprofit debt consolidation company, a financial counselor will negotiate with credit card companies to lower the interest rates you pay on your credit card. The counselor will also present the proposed debt management plan to the creditors for approval.

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

This version of consolidation only works if creditors agree with the proposed arrangement. You will also need to close any credit cards enrolled in the plan.

Types of debt serviced by nonprofit debt consolidation companies

Nonprofit debt management companies focus on assisting with unsecured debt, including credit cards and medical bills. However, secured debts that are tied to an asset, like mortgages and auto loans, along with student loans cannot be included in a debt management plan. Still, a credit counselor may be able to provide insight or share resources to help make the balances more manageable.

  • This is the most common type of unsecured debt in debt management plans. You’ll typically have to close any cards under the plan once you enroll, but you may be able to save a sizable amount in interest. Another upside is that if the credit counselor is able to negotiate more favorable terms, you can potentially pay off the balances faster than you would if managing them on your own.
  • When it comes to student loan assistance, nonprofit debt management companies will typically help clients explore their options, says Ross.

    “These options may include loan cancellation, consolidation, or income-driven repayment plans. The options will vary depending on whether the client has federal or private student loans, as federal student loans have different types of repayment plans.” That said, you should know that these debts aren’t eligible for enrollment in a debt management plan.
  • Nonprofit debt management counselors can help analyze your financial situation and outline various personalized options to address the debt, including providing social service referrals, financial management resources and the option to enroll in a debt management program.

What to look for in a nonprofit debt consolidation company

When you’re selecting a nonprofit debt relief company, look for one that has received accreditation from an independent organization. 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. Financial counselors with NFCC have been trained and certified.

How long a nonprofit has been in operation should also be considered. Along with time in business, check the Better Business Bureau and look for what consumers are saying on sites like TrustPilot.

Nonprofit debt consolidation vs. for-profit debt relief

Nonprofit credit counseling agencies receive financial support from other sources, so their services are either free or inexpensive. Nonprofit debt consolidation agencies also typically provide free educational materials, including those for budgeting and college or retirement planning.

For-profit debt settlement companies seek to make a profit when they assist you. Plus, they generally don’t provide ongoing financial education to their clients.

Nonprofit debt consolidation

As previously mentioned, if you adopt this approach to manage debt, your financial counselor will work with your credit card companies to lower the interest rates on your debt.

You’ll continue to make regular monthly payments to the nonprofit debt consolidation company, which then passes the money on to your credit card companies. That means you still make payments on time and lower your monthly debt, which will help improve your credit.

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

For-profit debt relief

The aim of a for-profit debt relief company is to make money, and the companies may try to sell you products or services. You’ll also be advised to stop paying your bills and instead put money into an escrow account. The company will try to negotiate a debt relief plan with your creditors, but not paying your creditors can cause a variety of problems.

“Not paying your creditors will result in collections, additional late fees, and possibly legal action,” says American Consumer Credit Counseling’s Ross.

Plus, there is no guarantee that your creditors will agree to the debt relief deal that the company tries to negotiate, potentially leading to even more problems. Even if the settlement suggested for the for-profit debt relief company is accepted, your credit score takes a major hit because you stop paying your bills.

Bottom line

A for-profit debt relief company may claim to settle your debts for a fraction of what you owe, there’s no guarantee your creditors will accept the settlement the company proposes. Because you won’t pay your bills for months, fees may pile up and your credit drop significantly.

In contrast, if you work with a nonprofit debt consolidation company, your debt will gradually be paid back over time at a lower interest rate, and your credit rating won’t take a major hit. You’ll also avoid calls from bill collection agencies and costly late fees. Weigh the benefits and drawbacks of each to make an informed decision.