What is nonprofit debt consolidation?

How does nonprofit debt consolidation work?

Debt consolidation usually involves working with a credit counseling agency or other nonprofit organization to help you manage your debt and improve your credit. Instead of consolidating your debts with a loan, you’ll create a debt management plan that allows you to make a single payment to the nonprofit agency.

You’ll work with a credit counselor, create a reasonable budget you can stick to, and come up with a debt payoff plan that fits within your budget. The agency then negotiates payments with your creditors that fit within your budget and sets up a payment schedule for you to follow.

» COMPARE: Pros and cons of debt consolidation

Benefits of nonprofit debt consolidation

If you want to create a debt management plan to get caught up on your debts and repair your credit score, a nonprofit debt consolidation company may be the best option. While some debt relief companies charge high fees for their services, which can hurt your credit score, a nonprofit credit counseling agency charges low fees and designs a plan that protects your credit.

Credit counseling agencies offer free consultation services to help you organize your finances and evaluate if a debt management plan is right for you. And because credit counseling agencies are nonprofits, you won’t be overcharged for services.

In most cases, 100% of your monthly payments (after any fees) will be sent to your creditors. The plan is completed when your creditors are repaid in full, which has the potential to boost your credit score.

Drawbacks of nonprofit debt consolidation

Credit counseling agencies won’t work for every situation. If you are behind on federal tax payments or your mortgage, a credit counseling agency might not be able to help much.

Creditors also are not required to work with credit counselors, which potentially limits their ability to negotiate your debts. Some creditors won’t work with credit counselors at all, and others might refuse the terms presented. This can make it difficult to manage your debt payoff between your debt management plan and other debt obligations.

Nonprofit debt consolidation vs. other debt relief options

Nonprofit debt consolidation can be a good option for paying off credit cards and other consumer debts, but it’s not the only one. Here are some alternatives to credit counseling agencies and how they compare:

• Debt consolidation: Debt consolidation loans allow you to pay off multiple types of debt with a single personal loan — effectively consolidating your debts into a single monthly payment. This can help you lower your interest rates and increase your cash flow at the same time. But you must have excellent credit to get the best rates.
• Debt settlement: Debt settlement is a strategy used by debt relief companies to lower your debt payoff amounts and pay off your debts faster. The goal of debt settlement is to pay less than you owe and clear your debts quickly — but it can hurt your credit score. Plus, forgiven debt amounts may be taxable as income.
• Balance transfer credit card: These let you transfer the balance of multiple credit cards onto a single card. Most balance transfer cards come with an introductory 0% interest rate for a set amount of time. This can help lower your minimum payments and pay down your credit card debts faster.
• Bankruptcy: If you simply cannot make your debt payments and need a full reset on your financial life, you might consider bankruptcy. This is a last-resort option that can wipe out your consumer debts but can also wreck your credit for years to come.

Which debt relief strategy is right for me?

When choosing between these debt relief strategies, there are a few factors to consider:

• Types of debt: If you have credit card debt or other unsecured debts, credit counseling or balance transfers can be a good choice. But if you’ve got multiple types of debts, you might consider debt consolidation or debt settlement.
• Ability to repay: If you can’t keep up with payments, credit counseling can help you create a budget and negotiate payment plans. But debt settlement or even bankruptcy can be an option if you have very few resources available to help you repay.
• Credit score: If you want to protect your credit score, credit counseling is typically the best option. But you might also qualify for a low-interest debt consolidation loan to help lower your payments.