FiCEP Debt Management Strategies 5 — Questions and Answers
Question 1: A client earns $3,200/month net and has $1,600 in monthly debt payments. What is their debt-to-income ratio, and how would a financial counselor generally classify it?
- 25% — considered healthy
- 50% — considered dangerously high (Correct answer)
- 40% — considered borderline manageable
- 60% — considered acceptable for long-term sustainability
Correct answer: 50% — considered dangerously high
A 50% DTI ($1,600/$3,200) is considered dangerously high; most counselors recommend keeping total DTI below 36%.
Question 2: Which type of student loan is eligible for Public Service Loan Forgiveness (PSLF)?
- Private student loans from banks or credit unions
- Federal Direct Loans only (Correct answer)
- Federal Family Education Loans (FFEL) without consolidation
- Perkins Loans without consolidation into a Direct Loan
Correct answer: Federal Direct Loans only
Only Federal Direct Loans qualify for PSLF; FFEL and Perkins Loans must be consolidated into a Direct Consolidation Loan to become eligible.
Question 3: A creditor sends a client a 1099-C for $6,000 in cancelled credit card debt. The client's total liabilities exceeded assets by $8,000 at the time of cancellation. What IRS exclusion may apply?
- The Bankruptcy exclusion requires a court filing to apply
- The insolvency exclusion may allow the client to exclude up to $6,000 from taxable income (Correct answer)
- The qualified principal residence exclusion covers all cancelled debts
- No exclusion is available for credit card debt cancellation
Correct answer: The insolvency exclusion may allow the client to exclude up to $6,000 from taxable income
The IRS insolvency exclusion allows taxpayers to exclude cancelled debt from income to the extent they were insolvent immediately before the cancellation.
Question 4: What is the primary purpose of a cease communication letter sent to a debt collector under the FDCPA?
- It eliminates the client's legal obligation to repay the debt
- It requires the collector to stop all collection communications except for specific permitted notices (Correct answer)
- It extends the statute of limitations on the debt
- It automatically triggers a debt validation process
Correct answer: It requires the collector to stop all collection communications except for specific permitted notices
A cease communication letter requires the collector to stop contacting the consumer, except to confirm no further contact or to notify of specific actions like a lawsuit.
Question 5: In a Chapter 13 bankruptcy repayment plan, how long can the plan typically last for a debtor whose monthly income is above the state median?
- 12 months
- 24 months
- 36 months
- 60 months (Correct answer)
Correct answer: 60 months
Debtors with above-median income must propose a 60-month (5-year) Chapter 13 plan under the Bankruptcy Abuse Prevention and Consumer Protection Act.
Question 6: A client is considering balance transfer to a 0% APR card for 18 months. Which factor should the counselor emphasize as the most critical risk?
- Balance transfers have no fees and are always cost-neutral
- If the balance is not paid in full before the promotional period ends, deferred interest may apply at the regular APR (Correct answer)
- The transferred balance is immediately reported as a new account with a higher credit score impact
- Zero percent promotions are illegal under federal consumer protection law
Correct answer: If the balance is not paid in full before the promotional period ends, deferred interest may apply at the regular APR
Many balance transfer offers impose deferred interest or a high go-to APR on remaining balances once the promotional period expires, potentially eliminating all savings.
Question 7: When evaluating a client for a Debt Management Plan, which credential indicates the counseling agency meets minimum quality standards?
- Membership in the American Bankers Association (ABA)
- Accreditation by the National Foundation for Credit Counseling (NFCC) or Council on Accreditation (COA) (Correct answer)
- Approval by the Federal Reserve Board
- Certification by the Consumer Financial Protection Bureau (CFPB)
Correct answer: Accreditation by the National Foundation for Credit Counseling (NFCC) or Council on Accreditation (COA)
The NFCC and COA are the primary accreditation bodies for nonprofit credit counseling agencies, ensuring adherence to ethical and quality standards.
FiCEP Debt Management Strategies 5
A client earns $3,200/month net and has $1,600 in monthly debt payments.
What is their debt-to-income ratio, and how would a financial counselor generally classify it?