How Nonprofit Debt Consolidation Works

A nonprofit debt consolidation program, also referred to as credit counseling or debt management, allows you to combine your debt into one monthly payment. You do not have to take out a loan or another line of credit, which might be necessary if you go through a for-profit agency to develop a debt consolidation program. For-profit agencies often charge high monthly fees, and some do not provide the services promised. You should clarify the terms of the agreement to ensure you are pursuing a nonprofit debt consolidation program, because some company titles are misleading. Authentic nonprofit debt consolidation companies receive their "nonprofit" status from the IRS, and they charge fees, too, although they are much lower. The exact procedures to complete a nonprofit debt consolidation program vary by organization, but some steps are common across all agencies.

Document Gathering

The first step of a nonprofit debt consolidation plan involves gathering of all your bills and income sources. All current debt, including medical bills, collection agency accounts and debts that are current but you want to include in the plan, must be documented and given to the credit counselor. You also must provide proof of all current income sources and, in some cases, household expenses. Some agencies request cost information on necessary utilities only, while others include optional services, such as Internet fees.

Case Evaluation

The credit counselor evaluates your total debt versus your actual income before proceeding with the creation of a plan. You may not be eligible to participate in a debt consolidation plan if your estimated debt outweighs your projected income over time by a significant margin. The monthly consolidation payments usually would be too high for you to make while meeting basic living expenses in that case.

Creditor Negotiations

The credit counselor contacts each of your creditors by phone, mail or email. The counselor negotiates with your creditors, hoping to reach an agreement to lower your debt by a percentage (perhaps 30 percent, for example) and accept a monthly payment arrangement. The creditor is asked to suspend all collection activities and agree to the arrangement in writing.

Plan Acceptance

You receive a monthly payment plan from your counselor at the conclusion of the consolidation. The plan shows how much you pay each month, including service fees the nonprofit charges to cover overhead, how much each creditor agreed to accept in the settlement, and a breakdown of how your monthly payment will be distributed. You submit the payment to the nonprofit agency, and the money is forwarded to your creditors. You must sign the agreement and make all payments on time, as specified by the counselor, for the consolidation to remain in effect.