What nonprofit debt consolidation is and how it works

If you’re one of the almost half of Americans who carry a credit card balance every month, you might struggle to juggle multiple debt payments to numerous creditors. You have to remember all the different due dates and make sure the money is available when you need to pay each bill.

Debt consolidation can help by combining two or more debts into a single payment with a due date that works for you. Nonprofit debt consolidation may be particularly useful for borrowers who are taking care to protect or improve their credit scores.

What is nonprofit debt consolidation?

Unlike traditional debt consolidation, nonprofit debt consolidation does not require a new loan to pay off your other debts.

Instead, a nonprofit debt consolidation service works with your creditors to create a debt management plan (DMP). The DMP allows you to make one payment to the nonprofit consolidation services each month. The service will distribute your payment to the individual creditors for you.

“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.”

It’s important to note that “nonprofit” doesn’t necessarily mean the service is free for borrowers. It simply means that the service does not turn a profit for owners.

However, much of the nonprofit debt relief services funding comes from government programs, grants and donations. As a result, these organizations can offer much lower fees for their service than a for-profit company that relies on customers to turn a profit. Sometimes, nonprofit debt relief organizations may have enough outside funding to offer their services free to borrowers.

How nonprofit debt consolidation works

When you hire a nonprofit debt consolidation company, a financial counselor will contact your creditors to negotiate more favorable terms on your debts.

The counselor might be able to get late fees waived or even lower your interest rate. A lower interest rate reduces the total amount you’ll have to pay on the debt, which can mean a lower monthly payment.

The counselor will then create a DMP based on your budget and schedule. Tell your financial counselor if you are struggling to make the current payments on your debts. They may be able to negotiate lower monthly payments either through lower interest rates or by extending the terms of the loans. Just remember that extending the loan term may mean paying more in interest expenses over the long haul.

You should also tell your financial counselor which payment date works best for you. For example, if you get paid on the 1st, they might schedule the payment for the 4th, when you will likely have the funds in your account.

Your counselor will then present the proposed debt management plan to your creditors for approval. Nonprofit debt consolidation only works if creditors agree with the proposed arrangement.

Types of debt eligible for nonprofit debt consolidation

Nonprofit debt management services typically only apply to unsecured debt.

Credit card debt

This is the most common type of debt in debt management plans. Americans carry a lot of credit card debt. With credit card interest rates being so high, your credit counselor may have more room to negotiate the rate down. A lower rate could reduce your monthly payment or even help you pay off the balance faster.

Credit card companies may require you to close active accounts before they will approve a debt management plan. You would not be able to use that card for future purchases, and it may result in a temporary decrease in your credit score.

The average age of credit and total available credit are two main factors in calculating your credit score. Closing a long-open account affects both categories.

Medical debt

Medical debt comes with more consumer protections than credit card debt, so a nonprofit debt management counselor may have more options for negotiating this debt, such as social service referrals. In some states, medical debt forgiveness may be an option.

Student loans

Student loans may or may not be eligible for nonprofit debt consolidation, often depending on if they are federal or private. However, there may be additional options to help ease the student loan burden.

According to 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.”

Debts that are ineligible for nonprofit consolidation

Debts that are secured by collateral are typically excluded from debt consolidation services.

Home loans

Home mortgage loans are secured by the property being mortgaged. This means the lender could foreclose on the home if the borrower fails to repay the loan. Home loans are not eligible for nonprofit debt consolidation plans as a secured debt.

Auto loans

Auto loans are secured by the vehicle. If a borrower fails to repay the loan, the lender could repossess the vehicle. Using the automobile as collateral disqualifies auto loans from nonprofit debt consolidation.

Nonprofit debt consolidation vs. for-profit debt relief

Nonprofit debt consolidation and for-profit debt consolidation have several important differences.

The financial objectives of the companies

Nonprofit credit counseling agencies are not focused on turning a profit. Any profits must be funneled back into activities that support the organization. No individual shareholders are looking to benefit financially from the organization’s profitability.

By contrast, for-profit debt relief companies aim to make money from their services.

How the organizations are funded

Nonprofits receive financial support from other sources, such as grants, government programs and charitable donations, so their services are inexpensive or free to borrowers.

For-profits are funded by the consumers using the service. This means for-profit companies must charge customers more than nonprofit organizations.

When the organizations pay creditors

Nonprofit debt consolidation services can begin making payments to creditors on your behalf as soon as the creditors approve your DMP. As long as payments are up to date on your accounts, the nonprofit debt consolidation service can take over with no interruption to your payments. This means no late fees or penalties from the creditors.

For-profit debt relief companies, on the other hand, often require that accounts go delinquent before they begin negotiations. They want the creditor to be concerned that the borrower may default on the loan completely. That gives the debt counselor more leverage in negotiations. While this strategy can potentially result in some level of debt forgiveness, it can also severely impact your credit score and finances.

“Not paying your creditors will result in collections, additional late fees and possibly legal action,” says Ross.

Additionally, there is no guarantee that your creditors will accept the proposed settlement, which would mean risking your credit score for nothing.

Ongoing support

Nonprofit debt consolidation agencies often provide free educational resources to help with financial tasks like budgeting, credit repair or retirement planning.

For-profit debt settlement companies may offer some free resources for ongoing support but often charge for premium versions of these tools.

Pros and cons of nonprofit debt consolidation

The benefits of nonprofit debt consolidation include:

• Less impact on your credit score compared to a for-profit debt relief service
• Lower cost than for-profit debt relief
• More manageable payment schedules
• No need to apply for a debt consolidation loan
• Potentially lower interest rates
• Potentially lower monthly payments

There are also a few possible downsides of nonprofit debt consolidation, including:

• A temporary dip in your credit score
• Not available for secured loans
• The requirement to close accounts

How to choose a nonprofit debt consolidation service

When selecting a nonprofit debt relief company, look for one accredited by an independent organization.

Companies that join the National Foundation for Credit Counseling (NFCC), for example, 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 the NFCC have been trained and certified.

You should also check online reviews to see if customers are generally satisfied with the service. Check reputable review sites like the Better Business Bureau, TrustPilot and Consumer Affairs.

The bottom line

Nonprofit debt consolidation is a legitimate, affordable way to manage debt by creating a more manageable repayment structure. Working with a nonprofit debt consolidation service can lower your interest rates, reduce your monthly payments and save your credit score from taking a major hit.

Find a reputable nonprofit debt consolidation service by searching for accredited debt counselors through the National Foundation for Credit Counseling (NFCC).