How Non-Profit Debt Consolidation Works

People can feel imprisoned by high credit-card interest rates and growing debt. See more pictures of debt.
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Peeking out from under your pile of bills is a postcard that looks like your saving grace: smiling, happy people proclaiming that they are free from debt -- and that you can be, too! The company's Web site is filled with testimonials from cheery faces, all saying how the company freed them from debt. Even better, the company says it's non-profit, so it has your best interest in mind, right? Unfortunately, that isn't always the case.

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Debt consolidation companies help people in debt by combining all of their outstanding payments (credit cards, student loans, medical debt) into one payment [source: Chatzky]. Often, the debtor takes out a new, lower-interest loan to cover this payment. The consolidation company may also offer credit counseling and may negotiate with the credit companies to reduce the amount of debt owed. So how do they do it? Non-profit debt consolidation companies can offer their services for little to no cost through funding from donations, creditors and government grants.

Just as there's no magic pill for baldness, weight loss, or wrinkles, there's no magic pill for eliminating debt quickly, completely and easily. Even with a legitimate non-profit debt consolidation company, it will still take years to wipe out debt. Consumers have to be careful of the temptation to spend more since they have a new loan. If you use a car or house as collateral on the loan, the bank can seize it if you default on payments. Using a debt consolidation service could also affect your credit report [source: DebtHelp].

Picking a not-for-profit debt consolidator can be difficult. Some companies abuse their non-profit status. Others seem local, but are actually located in another country. Read on for how to choose the right non-profit debt consolidator for you.

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Signs of a Reputable Non-Profit Debt Consolidation Firm

Companies may promise quick and easy debt relief, but consumers must be careful who they trust.
Companies may promise quick and easy debt relief, but consumers must be careful who they trust.
Peter Macdiarmid/Getty Images

With thousands of companies jockeying for your business, it can be daunting to pick one. We'll go over a few things to keep in mind when you're investigating non-profit debt consolidation services.

Many consolidators say they're non-profit, but actually make profits in the millions. Companies use the "non-profit" label to lure people into thinking they have customers' best interests in mind. Other companies use their non-profit status to violate telemarketing laws from which charitable organizations are exempt [source: Federal Trade Commission]. Ask for proof of non-profit (501(c)(3)) status before doing business with an agency.

Some companies use religious affiliations in their names or on their Web sites. Some services do have genuine relationships with a religion, but some companies are just using the name so that you will be more willing to trust them. Don't let a religious affiliation sway your choice -- choose the service that is right for you.

Fees: Not all non-profits are free, but true non-profits should have minimum set-up and monthly fees. Some agencies advertise voluntary fees, but then force you to pay the full fee, even if it's too expensive for you. If a service has high fees, is vague about their fees, or forces you to pay a so-called voluntary fee beyond your means, go to a different agency. And be aware that with many agencies, the first month's payment will likely go to the debt consolidation firm -- not your creditors.

It took time to get into debt, and it will take time to get out of debt. Don't trust an agency that promises you will be debt-free in months. Likewise, make sure the debt consolidation firm spends its time on you. The National Foundation for Credit Counseling, a non-profit community organization, spends an hour, in person or on the phone, on a consultation to decide if you need consolidation [source: Dunleavey]. If a firm gives you a plan in a short amount of time, they have not spent enough time reviewing your expenses. Use an agency that spends a significant amount of time examining your finances.

Better Business Bureau (BBB): The Better Business Bureau uses a Reliability Report to keep records on businesses so consumers can choose the most trustworthy companies. The BBB maintains information on products and services, along with a record of complaints and complim­ents [source: Better Business Bureau]. Companies receive a satisfactory or unsatisfactory record based on how they handle customer issues. Before you decide on a company, check the BBB and only choose a firm with a satisfactory rating.

It can seem overwhelming to pick a non-profit debt consolidation firm with so many choices out there. But with a little patience and a lot of research, you can pick one that's right for you -- making you one of those smiling, debt-free people.

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Sources

  • Better Business Bureau. "Check Out a Business or Charity." http://us.bbb.org/WWWRoot/SitePage.aspx?site=113&id=0549fde2-bc14-4256-9a10-5765e419bcba (Accessed 5/7/08)
  • Chatzky, Jean. "Should I trust credit-counseling agencies?" MSNBC. 8/20/08. http://www.msnbc.msn.com/id/5772061/ (Accessed 5/7/08)
  • Dunleavey, MP. "Your 3 worst debt consolidation moves." MSNmoney. http://moneycentral.msn.com/content/savinganddebt/managedebt/p36230.asp (Accessed 5/7/08)
  • DebtHelp. "Debt Consolidation Loan." http://www.debthelp.com/debt-consolidation/loan.html (Accessed 5/7/08)
  • Federal Trade Commission. "National Debt Consolidation Scheme Misleads Consumers About Costs, Benefits, and Nonprofit Status, FTC Says." 1/8/07. http://www.ftc.gov/opa/2007/01/expresscon.shtm (Accessed 5/7/08).
  • Newsweek. "Debt Consolidation: Beware Big Fees And Big Promises." 1/3/02. http://www.newsweek.com/id/63248/page/1 (Accessed 5/7/08)
  • Welsh, Kristy. "Are Non-Profit Debt Consolidation Companies the Saviors They Seem?" Credit Infocenter. http://www.creditinfocenter.com/pressreleases/DebtConsol.shtml (Accessed 5/7/08)