Nonprofit Debt Consolidation

Nonprofit Debt Consolidation Definition and Meaning

Nonprofit debt consolidation means working with a nonprofit credit counseling agency to create a debt management plan that allows you to make one monthly payment for all of your debts. Having just one monthly payment could make your financial life easier if you owe money to several creditors. 

During the nonprofit debt consolidation process, the credit counseling agency works with you to determine the full amounts you owe. The agency will then talk to your creditors and try to negotiate a debt management plan (DMP) to help you pay your balances. 

A DMP won't reduce what you owe, but you'll sometimes be able to get fees waived and interest charges lowered. This could reduce your total monthly payment.

Nonprofit Debt Consolidation: a Comprehensive Breakdown

Nonprofit debt consolidation is one way to consolidate debts. The more common meaning of consolidation is when you get a new loan to pay off multiple existing debts. 

Both methods could simplify your payments and possibly reduce your interest rate. That's where the similarities generally end.

With nonprofit debt consolidation, you don’t get a new loan. Your credit counselor is just taking over the management of your debt for you. The credit counselor negotiates with your creditors to make arrangements for when and how you will make payments. This doesn’t result in a reduced balance, like debt settlement, but could mean lower fees. 

Your debt management plan will usually require you to make payments for several years, depending on your debt balance. Although you'll have a single payment, the amount you’ll pay could vary based on the debt you owe. Your counselor should work with you to try to make the monthly payment affordable. 

Once you have a DMP in place, you send a single monthly payment to the nonprofit credit counselor instead of paying multiple creditors directly. The credit counseling agency divides up the payment and pays the appropriate amount to each creditor, based on the terms of your plan. 

Your credit cards will typically be closed when you enter into a debt management plan. This could hurt your credit score in the short term by lowering your average account age and by increasing your credit utilization ratio. However, if your plan allows you to take better control of your debt and become debt-free, your score should go up over time. 

Key Attributes of Nonprofit Debt Consolidation

The key features of nonprofit debt consolidation include:

• Working with a nonprofit credit counseling service to create a repayment plan with your creditors

• You typically have to close your credit cards (or your issuer may close the account)

• Balances aren't reduced—but your interest rate might be, and some fees may be waived

• You make one monthly payment to the nonprofit credit counselor, and the counselor distributes the payment to your creditors

• A DMP usually lasts three to five years