FiCEP Debt Management Strategies 2

Question 1

What is the debt avalanche method and when is it most advantageous?

Accepted Answer

Paying off the highest interest rate debt first to minimize total interest

Answer

The debt avalanche method prioritizes debts by interest rate, highest first, minimizing total interest paid.

Question 2

A client has $15,000 in credit card debt at 18-26% APR. What consolidation option should be explored first?

Accepted Answer

Balance transfer to a 0% introductory APR card if qualified

Answer

A 0% introductory APR balance transfer card can save significant interest if the client qualifies and pays down within the promotional period.

Question 3

What is a debt management plan and who typically administers them?

Accepted Answer

A structured repayment plan administered by a nonprofit credit counseling agency

Answer

DMPs are administered by nonprofit credit counseling agencies, often securing reduced interest rates and waived fees.

Question 4

When might debt settlement be appropriate, and what are its major risks?

Accepted Answer

It may be suitable for severely distressed borrowers but risks tax liability, credit damage, and lawsuits

Answer

Debt settlement may help severely distressed borrowers but carries significant risks including taxes on forgiven debt and credit score damage.

Question 5

What is the difference between Chapter 7 and Chapter 13 bankruptcy?

Accepted Answer

Chapter 7 liquidates assets to discharge debts; Chapter 13 creates a 3-5 year repayment plan

Answer

Chapter 7 involves liquidation of non-exempt assets, while Chapter 13 sets up a court-supervised repayment plan.

FiCEP - Financial Counseling Certification Program Practice Test