Budgeting & Debt Management Flashcards
7 cards from real AFC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Budgeting & Debt Management flashcards as text
Under the Fair Debt Collection Practices Act (FDCPA), which action by a third-party debt collector is prohibited?
Answer: Contacting the debtor's employer repeatedly to embarrass them
The FDCPA prohibits debt collectors from using harassment, including contacting employers in ways designed to embarrass the debtor.
Which budgeting approach is most suitable for clients with irregular or variable income, such as freelancers?
Answer: Zero-based budgeting using the lowest expected monthly income as the baseline
Using the lowest expected income as the baseline ensures essential expenses are covered even in low-income months.
A client is considering debt settlement. Which consequence should an AFC counselor emphasize as a major drawback?
Answer: Forgiven debt amounts may be treated as taxable income by the IRS
The IRS generally treats cancelled or forgiven debt as ordinary income, which can create an unexpected tax liability.
What does a negative net cash flow in a client's monthly budget indicate?
Answer: The client is spending more than they earn each month
Negative net cash flow means monthly expenses exceed income, which leads to accumulating debt or depleting savings over time.
Which of the following best describes a 'debt management plan' (DMP) offered through a nonprofit credit counseling agency?
Answer: The client makes one monthly payment to the agency, which distributes funds to creditors at negotiated lower interest rates
A DMP consolidates payments through the agency and typically secures reduced interest rates and waived fees from creditors.
A client's gross monthly income is $5,000 and total monthly debt payments are $2,100. How should their DTI ratio be characterized?
Answer: High — above 36%, indicating financial stress
A DTI of 42% ($2,100 / $5,000) exceeds the 36% threshold, signaling that the client carries a dangerously high debt burden.
Which budgeting strategy specifically requires every dollar of income to be assigned a purpose so that income minus all allocations equals zero?
Answer: Zero-based budgeting
Zero-based budgeting assigns every dollar a job — savings, expenses, or debt — so the total budget balances to zero each month.