AFC Budgeting & Debt Management 5 — Questions and Answers
Question 1: Under the Fair Debt Collection Practices Act (FDCPA), which action by a third-party debt collector is prohibited?
- Sending written notices of the debt amount
- Calling between 8 a.m. and 9 p.m. local time
- Contacting the debtor's employer repeatedly to embarrass them (Correct answer)
- Reporting the debt to credit bureaus
Correct 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.
Question 2: Which budgeting approach is most suitable for clients with irregular or variable income, such as freelancers?
- Zero-based budgeting using the lowest expected monthly income as the baseline (Correct answer)
- 50/30/20 rule based on average annual income divided by 12
- Pay-yourself-first with a fixed dollar amount each month
- Envelope budgeting with identical monthly allocations
Correct 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.
Question 3: A client is considering debt settlement. Which consequence should an AFC counselor emphasize as a major drawback?
- Settled debts are not reported to credit bureaus
- Forgiven debt amounts may be treated as taxable income by the IRS (Correct answer)
- Settlement eliminates the ability to use credit cards in the future
- Creditors are legally required to accept settlement offers
Correct 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.
Question 4: What does a negative net cash flow in a client's monthly budget indicate?
- The client is saving more than they spend
- The client is spending more than they earn each month (Correct answer)
- The client has more assets than liabilities
- The client's debt-to-income ratio is below 36%
Correct 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.
Question 5: Which of the following best describes a 'debt management plan' (DMP) offered through a nonprofit credit counseling agency?
- The agency purchases the client's debt and resells it at a discount
- The client makes one monthly payment to the agency, which distributes funds to creditors at negotiated lower interest rates (Correct answer)
- The agency files for bankruptcy on the client's behalf
- Creditors forgive a portion of the principal in exchange for lump-sum payments
Correct 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.
Question 6: A client's gross monthly income is $5,000 and total monthly debt payments are $2,100. How should their DTI ratio be characterized?
- Excellent — below 20%
- Acceptable — between 20–35%
- High — above 36%, indicating financial stress (Correct answer)
- Debt-free — no actionable concern
Correct 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.
Question 7: Which budgeting strategy specifically requires every dollar of income to be assigned a purpose so that income minus all allocations equals zero?
- Pay-yourself-first budgeting
- Proportional budgeting
- Zero-based budgeting (Correct answer)
- Reverse budgeting
Correct 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.
AFC Budgeting & Debt Management 5
Under the Fair Debt Collection Practices Act (FDCPA), which action by a third-party debt collector is prohibited?