Debt Management Strategies Flashcards
6 cards from real FICEP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Debt Management Strategies flashcards as text
What is the debt avalanche method and when is it most advantageous?
Answer: Paying off the highest interest rate debt first to minimize total interest
The debt avalanche method prioritizes debts by interest rate, highest first, minimizing total interest paid.
A client has $15,000 in credit card debt at 18-26% APR. What consolidation option should be explored first?
Answer: Balance transfer to a 0% introductory APR card if qualified
A 0% introductory APR balance transfer card can save significant interest if the client qualifies and pays down within the promotional period.
What is a debt management plan and who typically administers them?
Answer: A structured repayment plan administered by a nonprofit credit counseling agency
DMPs are administered by nonprofit credit counseling agencies, often securing reduced interest rates and waived fees.
When might debt settlement be appropriate, and what are its major risks?
Answer: It may be suitable for severely distressed borrowers but risks tax liability, credit damage, and lawsuits
Debt settlement may help severely distressed borrowers but carries significant risks including taxes on forgiven debt and credit score damage.
What is the difference between Chapter 7 and Chapter 13 bankruptcy?
Answer: Chapter 7 liquidates assets to discharge debts; Chapter 13 creates a 3-5 year repayment plan
Chapter 7 involves liquidation of non-exempt assets, while Chapter 13 sets up a court-supervised repayment plan.
A client pays only minimums on a $5,000 credit card at 22% APR. Approximately how long will payoff take?
Answer: Over 15 years
At typical minimum payments, a $5,000 balance at 22% APR would take over 15 years to repay with total interest exceeding the original balance.