Is Non-Profit Debt Consolidation My Best Choice?
If you are looking for help to resolve a debt problem, it is natural to want to do so at the lowest cost possible. Low cost is not the only concern, of course. As a smart consumer, you want to find an honest debt consolidation provider that you can trust to work hard for you.
Some debt consolidation companies try to convince you that they are working only for your interests by emphasizing that they are a "non-profit debt consolidation" company. They give you the impression that "non-profit debt consolidation" means that they don't make any money by working to resolve your debt problems. Would you be surprised to find out that the heads of some of the largest non-profit debt consolidation companies make close to $1,000,000 per year in salary? Some credit consolidation non-profit agency officials are among the nation's highest paid non-profit executives.
Don't assume that a debt consolidation non-profit is legitimate, simply because of its non-profit status.
What Does Non-Profit Debt Consolidation Mean
The "non-profit" in "non-profit debt consolidation" only refers to the firm's tax status with the IRS. The IRS recognized that there are problems with some firms representing themselves as non-profit debt consolidation companies. After an in-depth investigation, a few years ago, the IRS revoked the tax-exempt status of many debt consolidation non-profits.
The IRS found that there were many debt consolidation non-profit firms that claimed tax-exempt status, but were bringing in large profits. Many non-profit debt consolidation companies were using different methods to hide their profits. They were paying their executives excessively, compared to the pay that executives received at other similarly sized non-profit organizations.
What Do Debt Consolidation Non-Profits Do?
Non-profit debt consolidation programs offer the same services as for-profit firms, credit counseling programs. In non-profit debt consolidation programs, just as for-profit programs, you receive a financial review and help with working out a budget. If you are struggling with high interest debt, a debt management program (DMP) may be recommended. A DMP can help you by:
- Giving you a single monthly program payment that is split up and sent to your creditors
- Lowering your interest rates. (Not every account's interest rate is necessarily lowered. Your current interest rate with a creditor can be lower than the rate the credit counseling firm can get.)
- Reducing late fees and penalties, or even getting them waived
- Stopping creditor collection calls
- Helping you pay off all your debt in about five years
How do Debt Consolidation Non-Profits Collect Fees?
Non-profit debt consolidation companies charge you enrollment and monthly fees, as do for-profit firms. Some debt consolidation non-profits also pressure you into making a "voluntary contribution," giving you the impression that you are better off making the contribution than not. As the Federal Trade Commission says, "just because an organization says it's 'nonprofit,' there's no guarantee that its services are free, affordable, or even legitimate. In fact, some credit counseling organizations charge high fees, which may be hidden, or urge consumers to make 'voluntary' contributions that can cause more debt."
You may be surprised to learn that debt consolidation non-profits get some money directly from the creditors you owe. Non-profits receive "fair share" contributions from your creditors. The creditors are paying the non-profits a percentage of the money they receive from you each month. Despite receiving the "fair share" contribution, the fees that non-profits charge are in the same range that for-profit firms charge.
You generally will pay two types of fees, an enrollment fee and a monthly service fee. Both types of fees are capped by state law. Enrollment fees range from $25 to $75 per month, depending on the state, and monthly fees should not exceed $50.
Tips on Choosing the Right Debt Consolidation Firm
Here are a few basic tips to follow to find the best debt consolidation firm.
- Don't assign huge importance to a credit counseling firm's non-profit or for-profit status. Meeting the IRS' definition of non-profit does not mean that the firm will produce better results for you.
- Examine what they charge. Be very suspicious of any firm that claims it is working for you for free. While the financial review and budget counseling should be free, the debt management plan will have fees.
- Don't pay for a "membership savings plan" or make a "voluntary contribution. These are ways firms try to get around the state maximum fee regulations.
- Check out the firm's history and reputation.
- Comparison shop. You can get a better feel for any debt consolidation program and avoid getting scammed by hearing more than one presentation.
- Don't hire any firm that pressures you to sign up.
Don't let a debt consolidation firm's non-profit status lull you into trusting them without checking them out. The bottom line is how a credit counseling firm can help you, which is far more important than the firm's tax status.