What Is Nonprofit Debt Consolidation, and How Does It Work?
Nonprofit debt consolidation can simplify your finances by combining multiple payments into one and potentially lowering your interest rates, all without taking on new debt. This approach, typically offered through a nonprofit credit counseling agency, aims to make repayment more manageable without harming your credit.
If traditional debt consolidation loans aren’t an option, a debt management plan through a nonprofit may be a better alternative to debt settlement or bankruptcy. Here’s how nonprofit debt consolidation works and what to consider when deciding whether it’s the right solution for you.
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How does nonprofit debt consolidation work?
Nonprofit debt consolidation is another term for a debt management plan (DMP). This form of debt relief is offered by nonprofit credit counseling agencies, such as Money Management International, American Consumer Credit Counseling, and InCharge Debt Solutions.
Nonprofit debt consolidation is typically only available for credit card debt. However, you may be able to use the process for other types of unsecured debt, such as personal loans.
DMPs often last three to five years, but they can be shorter in some cases. Once you get set up, you’ll make one monthly payment to the agency for all your covered debts, and then it will distribute those funds to your creditors.
Generally, nonprofit debt management plans are valuable resources that help you pay off debts when you’re struggling to do so on your own.
Although the plan requires you to close your credit cards and not open new lines of credit, it may not completely address any behavioral issues that got you into debt. As you consider these programs, take a good look at the habits you want to change so you don’t repeat the cycle and get back into debt.
Chloe Moore, CFP®
What debt management strategies do nonprofits use?
In addition to consolidating your monthly payments, credit counseling agencies may employ other strategies to help save you money. More specifically, they may negotiate with your creditors to achieve the following objectives:
- Waive late and over-limit fees
- Lower your monthly payments
- Reduce your interest rates
- Bring past-due accounts current
What is nonprofit credit consolidation vs. debt consolidation?
The primary difference between nonprofit debt consolidation and traditional debt consolidation is that a DMP isn’t a loan. You won’t undergo a credit check when you apply, and your plan terms aren’t based on your creditworthiness.
Here are several other differences to keep in mind:
| DMP | Traditional debt consolidation |
| Qualify if you can’t afford your monthly credit card bills | Eligibility based on credit score, credit history, and income |
| Most last 3 – 5 years | Repayment terms of 1 – 7 years |
| You’ll still owe interest, but credit counselors might negotiate a lower rate | You might qualify for a lower interest rate than the rate on your current debt (depending on creditworthiness) |
| No credit check to apply | Hard inquiry on credit report to apply (can lower credit score by a few points) |
| Must close credit cards, which can damage credit score short-term by raising credit utilization ratio | You aren’t required to close credit cards, which can lead to a cycle of debt if you incur balances on your cards again |
| Several on-time payments can improve credit score | Paying bills on time can improve credit |
How do nonprofit debt consolidation companies make money?
Credit counseling agencies provide many free financial services, but if you opt for a DMP, you can expect to pay a setup fee and a monthly fee for the duration of your plan.
Fees can vary depending on the agency, so it’s important to shop around and compare multiple options before choosing one. With InCharge, for instance, the average monthly fee is $33, and the setup fee can be as high as $75.
Nonprofit debt relief vs. debt relief companies
If you’re not eligible for a debt consolidation loan or you have less-than-stellar credit and can’t qualify for a lower interest rate, debt settlement is another option you may consider.
Debt settlement is a service many for-profit debt relief companies offer. It involves negotiating with creditors to pay less than you owe.
These companies typically encourage you to stop paying your bills and contribute to a settlement fund instead. In the meantime, they’ll attempt to negotiate a settlement amount, which you pay in a lump sum once your account reaches the approved amount. Here’s how debt relief companies differ from nonprofit debt consolidation.
| Nonprofit debt consolidation | For-profit debt relief |
| 3 – 5 years to settle debt | 2 – 4 years to settle debt |
| Can damage your credit initially, but generally no lasting damage after you pay down your balances | Can cause your credit score to crash hard, with 7 years needed to recover |
| Monthly fees | Charge 15% – 25% of your total enrolled debt to perform a service you could do on your own for free |
| Lower rates and payments aren’t guaranteed, but agencies can help you pay down your balances while providing valuable advice | Results aren’t guaranteed |
The time to settle your debt will ultimately depend on how much you owe and your ability to pay into your settlement account. With the for-profit National Debt Relief, for instance, the process typically takes two to four years.
Debt relief company fees could be much higher than those associated with nonprofit consolidation. Settling $20,000 in debt with a for-profit debt relief provider that charges the standard 15% to 20% could cost you between $3,000 and $5,000—and many debt relief companies also charge monthly fees.
In contrast, a five-year DMP with a $33 monthly fee would cost you $1,980, which is spread out over time.
Remember, too, that late fees and additional interest on your debt can pile up during the settlement process as you work with a for-profit debt relief company, and you may be on the hook for taxes on the forgiven amount.
Which should you choose?
As you consider whether to work with a nonprofit credit counseling agency or a for-profit debt relief company, here are the most important factors to consider:
- Your credit score: If you’ve already missed several payments, adding more late payments to your credit reports may not matter because the damage has already been done. In this case, debt settlement could be worth considering.
- Your budget: A debt management plan can work for someone with sufficient income to keep paying their bills, especially if the credit counseling agency can negotiate lower interest rates and payments. If you can’t afford payments on a DMP, debt settlement or bankruptcy may be your only option.
- Your goal: If you want to pay back the full amount you owe and just need help, a DMP may be a better option. However, if you prefer to settle for less than you owe and get a fresh start in a shorter time, you might prefer working with a for-profit debt relief company.
A DMP is a solid option when your debt is manageable, and you have the budget to make consistent payments, but you need help creating and sticking to a plan.
If you’re really behind on payments and your credit has already been affected, consider a debt settlement or bankruptcy. Before making any decision regarding debt relief, it’s important to understand the risks involved and the long-term impact on your credit.
Consult with a reputable credit counselor who can evaluate your situation and explain your options.
Chloe Moore, CFP®
As with any financial decision, it’s important to take your time to research and compare all options to determine which path is the best for you.
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