How nonprofit debt consolidation works

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If you’re trying to pay off credit card debt but struggling to do it on your own, you might want to consider nonprofit debt consolidation.

Nonprofit 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 a good fit for you.

What is nonprofit debt consolidation?

When you undertake nonprofit debt relief, a financial counselor from a nonprofit debt consolidation company will work with you to set up a debt management plan that is more feasible for your budget. Your counselor 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’ll typically make one payment each month to the nonprofit debt consolidation company. The company uses that money to pay your creditors.

“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 non-profit American Consumer Credit Counseling. “With debt consolidation, you make one monthly payment on the day of the month that works best for you.”

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

You will also have to agree to close your credit cards so you can’t run up more debt on them. But you may be able to keep a credit card for emergencies.

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

Types of debt serviced by nonprofit debt consolidation companies 

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

When it comes to student loan assistance, non-profit 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.”

For those with medical debt, non-profit debt management counselors can help analyze your financial situation and outline a variety of personalized options to address the debt including providing social service referrals, financial management resources and the option to enroll in a debt management program.

Why work with a nonprofit debt consolidation company?

Nonprofit debt relief companies aren’t seeking to make a profit when they assist you. This is because much of their funding comes from grants from individuals and foundations. They also receive voluntary contributions from creditors. The goal of these agencies is to help you get on better financial footing.

“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’re able to help people experiencing a variety of financial hardships.”

These companies do charge fees, though, which are 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 setup fee for 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 enrolled but should average between $25 and $35. If you have a serious financial hardship, however, you may be charged no fees.

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

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.

You can also check a nonprofit debt relief company’s rating 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 look for 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 review the company’s social media presence to see if they are actively engaged in providing financial education, says Maliga.

Nonprofit debt consolidation vs. for-profit debt relief

Nonprofit credit counseling agencies and for-profit debt relief companies are different in various ways. Most notably, because nonprofit credit counseling agencies receive financial support from other sources, their services are either free or inexpensive. In addition, a nonprofit debt consolidation agency will typically provide free educational materials to assist with various aspects of financial planning including budgeting and college or retirement planning.

For-profit debt settlement companies are seeking to make a profit when they assist you. In addition, they generally don’t provide any type of ongoing financial education to their clients. Here are some of the most significant differences between the two types of companies to keep in mind.

Nonprofit debt consolidation

With nonprofit debt consolidation, your financial counselor will work with your credit card companies to lower the interest rates on your debt, and 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 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 instead put money into an escrow account. When the balance gets high enough, 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.

In addition, there is no guarantee that your creditors will agree to the debt relief deal that the for-profit debt relief company ultimately tries to negotiate. If the settlement is rejected, you’ll face even more financial problems.

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

With nonprofit debt consolidation, your credit score may go down some 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.

The Federal Trade Commission provides insight into these for-profit debt relief companies, which will generally try to establish a debt settlement plan with your creditors. That means the company will try to negotiate with your credit card companies to reduce the amount you owe.

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

There’s a good chance your accounts will be reported as delinquent during that 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’s no guarantee your creditors will accept the settlement the company proposes. Because you won’t pay your bills for months, your debts continue to grow and you might face endless calls from your credit card companies.

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.