Nonprofit debt relief explained

Nonprofit debt relief companies offer low-cost assistance when you're struggling to pay off credit card bills and other unsecured debts. While not always free, these companies charge lower fees than their for-profit counterparts. Nonprofit debt relief also generally poses less of a risk to your credit score.

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What is nonprofit debt relief?

Nonprofit debt relief is usually credit counseling or debt management from a company that doesn't make a profit from its clients. The most common types of nonprofit debt relief organizations are credit counseling agencies.

These work by first enrolling borrowers in a credit counseling session where you go over your finances and come up with a plan to pay your debt off. After an assessment, your credit counselor might recommend enrolling in debt management. This involves renegotiating your rates and terms while you continue to pay off your creditors.

Nonprofit organizations usually get funding though grants and only charge fees to cover operating expenses. You can often find credit counseling for free, though you might pay a small fee of around $25 to $50 for additional services.

Nonprofit debt relief standards

The National Foundation for Credit Counseling, or NFCC, sets industry standards for nonprofit debt relief companies. These are the main requirements that affect customers:

• Counseling before debt management. Customers must receive credit counseling first, including a written assessment of the situation and a financial action plan.
• Ability to compete debt management. Nonprofits must review current and prospective income and financial obligations before enrolling someone in debt management.
• Timely payments. They also must disburse funds to creditors at least twice a month for customers enrolled in debt management.
• Multiple ways to pay. Customers must have access to a variety of ways to make deposits toward debt management.
• Regular statements. Customers must also receive an account statement at minimum every quarter.
• Transparent. Agencies must follow disclosure requirements set by the FTC involving costs and risks of the programs.
• Legally operating. Agencies must be licensed, insured and bonded — meaning they're protected from illegal acts by employees.

Nonprofit vs. for-profit debt relief

The main differences between nonprofit and for-profit debt relief are in the type of service, price and risk.

Type of debt relief

Many for-profit debt relief companies offer debt settlement. This involves paying the company to negotiate down your balances in exchange for a one-time payment. Customers make monthly payments into a savings account, which the company draws from to settle your accounts and collect fees.

Nonprofits typically offer debt management, where they renegotiate your rates and terms for a small fee. You might not get out of debt as quickly, but this method lowers the monthly and total cost of your debt.

Total cost

For-profit debt relief costs more than nonprofit debt relief overall. For-profits tend to charge more because they aim to make a profit — not just cover operating expenses.

Usually these companies charge a fee of 15% to 25% of the debt you enroll in a debt settlement program, at the time of a settlement. Most programs require customers to enroll a minimum of $7,500, which gives you a minimum fee of $1,125.

Nonprofits usually charge a flat fee of around $25 to $50 for debt management, which involves negotiating with your creditors.

Monthly cost

For-profit debt settlement often also costs more than nonprofit debt relief on a monthly basis. Typically, debt settlement companies require you to make payments into an account to go toward the settlement.

Legitimate debt settlement companies also encourage customers to make at least a minimum monthly payment toward their creditors. This can double how much you pay toward debt each month in some cases.

This is not the case with debt management. You're only responsible for continuing making payments to your creditors.

Risk

The increased monthly cost and high fees of for-profit debt relief programs can be difficult to keep up with if you're facing financial hardship. If you stop paying your creditors, you could get sued. You'll also pay a lot more in interest and late fees.

It can also be harder to find a for-profit that's acting legally. You can find a government-approved nonprofit credit counseling agency on the Department of Justice's website. But when it comes to for-profit debt settlement, the closest equivalent is a Federal Trade Commission list of companies and individuals banned from debt relief.

What to look for in a nonprofit debt relief company

Look for a nonprofit debt relief company that's accredited and is a member of the NFCC. The NFCC requires all counselors to receive certification and training through the organization. Nonprofits must also be accredited by the Council on Accreditation, an independent nonprofit that verifies the organization is following best practices.

How to sign up with a debt relief company

Once you find a nonprofit you'd like to work with, you can get started by making an appointment for credit counseling. Usually you can meet over the phone or in person.

During the credit counseling session, you and the counselor will go over your finances, identify how you got into debt and come up with an action plan. In some situations, that might be all you need. In others, your counselor might recommend enrolling in debt management.

Bottom line

Nonprofit debt relief companies offer a safer way to get out of debt than their for-profit counterparts. They cost less, come with fewer risks and offer a type of debt relief that can be easier to manage. But read about all of your debt relief options before you sign up.

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