FiCEP Debt Management Strategies 4 — Questions and Answers
Question 1: A client has a $15,000 medical bill that went to collections 18 months ago. Under the FDCPA, which action by the collector would be a violation?
- Contacting the client by phone between 8 AM and 9 PM
- Sending a written validation notice within 5 days of initial contact
- Threatening to file a lawsuit when the debt is past the statute of limitations without intending to sue (Correct answer)
- Identifying themselves as a debt collector when calling
Correct answer: Threatening to file a lawsuit when the debt is past the statute of limitations without intending to sue
Threatening legal action on a time-barred debt without actual intent to sue is a deceptive practice prohibited by the FDCPA.
Question 2: Which debt repayment strategy minimizes total interest paid over time?
- Snowball method — paying smallest balances first
- Avalanche method — paying highest interest rate balances first (Correct answer)
- Consolidation method — combining all debts into one payment
- Minimum payment method — paying only the required minimums
Correct answer: Avalanche method — paying highest interest rate balances first
The avalanche method targets highest-interest debt first, mathematically reducing total interest paid over the repayment period.
Question 3: A client is 90 days delinquent on a $12,000 credit card. The creditor offers to settle for 60 cents on the dollar. What is a key tax implication the counselor should explain?
- The forgiven amount is always tax-free under IRS rules
- The forgiven $4,800 may be reported as taxable income on a 1099-C (Correct answer)
- Only forgiven amounts over $10,000 are taxable
- Settlement amounts are deductible as a financial loss
Correct answer: The forgiven $4,800 may be reported as taxable income on a 1099-C
Creditors must issue a 1099-C for forgiven debt over $600, and the client may owe income tax on the cancelled amount unless an exclusion applies.
Question 4: What distinguishes a Debt Management Plan (DMP) from debt settlement?
- A DMP requires the client to stop paying creditors temporarily while funds accumulate
- A DMP involves negotiating to pay less than the full balance owed
- A DMP pays creditors in full over time with negotiated reduced interest rates (Correct answer)
- A DMP is only available through bankruptcy proceedings
Correct answer: A DMP pays creditors in full over time with negotiated reduced interest rates
A DMP repays the full principal balance but typically secures concessions such as reduced interest rates and waived fees from creditors.
Question 5: Under the Military Lending Act (MLA), what is the maximum Military Annual Percentage Rate (MAPR) that can be charged to covered active-duty borrowers?
- 18%
- 28%
- 36% (Correct answer)
- No cap — lenders set their own rates
Correct answer: 36%
The MLA caps the MAPR at 36% for most consumer credit products extended to active-duty servicemembers and their dependents.
Question 6: A client wants to know if paying off a collection account will remove it from their credit report. What is the most accurate response?
- Paying off a collection account immediately removes it from the report
- A paid collection account is removed after 3 years
- The collection account remains for up to 7 years from the original delinquency date, but shows as paid (Correct answer)
- Collection accounts are never removed regardless of payment status
Correct answer: The collection account remains for up to 7 years from the original delinquency date, but shows as paid
Under FCRA, collection accounts remain on credit reports for 7 years from the original delinquency date, though the status updates to 'paid' upon settlement.
Question 7: When counseling a client about reaffirming a debt in Chapter 7 bankruptcy, what is the primary risk to communicate?
- The reaffirmed debt will be discharged immediately after reaffirmation
- The client remains personally liable for the reaffirmed debt after bankruptcy discharge (Correct answer)
- Reaffirmation automatically lowers the interest rate on the debt
- Reaffirmed debts are removed from the credit report
Correct answer: The client remains personally liable for the reaffirmed debt after bankruptcy discharge
Reaffirmation removes the debt from the bankruptcy discharge, meaning the client retains full personal liability if they later default.
FiCEP Debt Management Strategies 4
A client has a $15,000 medical bill that went to collections 18 months ago.
Under the FDCPA, which action by the collector would be a violation?