Writing Sample: Consumer Column

The Cost of Getting Out of Debt
March 30, 2008

Dealing with the Numbers

My credit card debt is twice that of the $9000 national average. My student loans…well let’s just say my $83,000 mortgage is considerably smaller. After hiding from my “numbers,” I realized that I needed a concrete plan to eliminate my debt and my fear of it.

Last month I took my first step out of fear and shame: I talked to a good friend about my debt. She turned me on to Dave Ramsey (http://www.daveramsey.com/). Ramsey has a radio show and financial counseling company that helps people eliminate debt. I borrowed Ramsey’s book, The Total Money Makeover, from my friend and got started.

During one of many discussions about debt management, my friend talked about purchasing other Ramsey products, some of which are over $300. I found this ironic.

“It’s funny,” I said during the phone call, “we’re trying to get out of debt, yet we’re being encouraged to spend more money.”

Debt elimination can be an expensive venture requiring research to determine the least financially daunting option.

Purchasing Financial Freedom

In a 2004 survey on consumer finances, the Federal Reserve Board revealed that over 46 percent of American families carry credit card balances. So, it is not surprising that many are seduced by the promises of financial self-help gurus.

Dave Ramsey, a survivor of massive debt, offers free information on his radio program and web site, including his signature “7 Baby Steps” principles; and he sales several products as well. The book I used to start my debt elimination program costs $14.95. Ramsey also offers a number of “kits”, such as The Financial Peace Home Study Plus that sales for $329.00. The latter is what my friend was considering. The parade of products appealed to her compulsive tendencies, a characteristic that many of us with heavy debt possess.

“The least expensive way [to get out of debt] is to knuckle down and make the decision to fix the mess…,” certified financial counselor Parker Thompson states. His company, Financial Focus, is located in Cumming, Georgia. “If it is a spending issue, fix it and cut back on spending.”

Consumers who get caught up in “the-call-to-buy” products like Ramsey’s may actually be sabotaging their efforts.


Credit Counseling, Debt Management and Consolidation

With the Federal Reserve Board projecting a 62 percent increase in outstanding credit card debt by 2010, Americans will find it harder to manage. As a result, many will seek assistance from agencies that focus on debt management and consolidation.

Consumer Credit Counseling Service of Greater Atlanta (CCCS) is a non-profit agency that “helped more than 400,000 Americans in 2007 and we project that approximately 600,000 Americans will utilize our services in 2008,” Scott Scredon, Director of Public Relations states.

Consumers are given recommendations on cutting expenses or increasing income and may enroll in the agencies debt management plan if their debt is too much to handle alone.

“Under this plan, we go to each creditor and establish a plan to pay off the person’s debt. The monthly payments from the individual vary based on the number of creditors involved, but the payments average $25 per month.”

While debt management programs such as CCCS of Greater Atlanta can be positive alternatives for debt reduction, they can also lead to negative marks on a consumer’s credit report depending on the policies of the companies that own the debt.

The preservation of credit scores and the promise of having all debt rolled into a single, low monthly payment often leads debtors to pursue consolidation loans. Thompson doesn’t recommend this route.

“Consolidation loans should be avoided. They do not change people’s behavior and they wind up in the same mess over and over.”

In addition to making it easier for consumers to continue with the behaviors that caused the trouble in the first place, consolidation loans may include unexpected fees, drain home equity, and expose consumers to expensive scams.


The Most Expensive Option

“The most expensive [plan for getting out of debt] is the bankruptcy option,” Thompson states. He is correct. In fact, this option has become more costly in recent years.

In October of 2005, a re-designed bankruptcy law went into effect. According to an article by Brigitte Yuille featured on Bankrate.com, “9 Bankruptcy Costs You Should Know About,” there has been a significant increase in filing fees: attorney ($6000 to $3500); mandatory credit counseling ($50 for pre and post filing sessions); and bankruptcy petition ($274-$299). Amendments to a petition increase the charges.

Even though bankruptcy negatively impacts credit for years, as Thompson recounts, some people prefer this option.

“One client still thinks it was the best thing he and his wife could have done. All their debt is gone and they are living in a brand new house, driving almost brand new cars. He does not want to talk about the double digit interest rates that he is paying on all three items.”

Doing It Yourself

My plan follows Ramsey’s: I have a budget, established a $1000 emergency fund, and embarked on a snowball plan paying off the smallest to largest balances. In the first six weeks I paid off one $1200 account and I am making a big dent in the balance that is next in line. I deviate slightly by saving $250 a month and paying into my Roth IRA with automatic transfers.

The process is slow, but it has changed my behavior. Most importantly, my plan doesn’t fund the lavish lifestyles of bankruptcy attorneys or financial gurus.



Helpful Web sites

Budget Templates:
Monthly
http://office.microsoft.com/en-us/templates/TC010233411033.aspx
Bi-weekly
http://office.microsoft.com/en-us/templates/TC300007261033.aspx?CategoryID=CT101172321033

Libraries
Libcat
http://www.librarysites.info/ (Get a library card and access the financial gurus’ expertise for free!)

Calculators
Debt repayment http://www.bankrate.com/brm/calc/creditcardpay.asp
Snowball plan http://www.whatsthecost.com/snowball.aspx?country=us

Debt Elimination Seminar
Motley Fool’s How to Get Out of Debt Guide
http://www.whatsthecost.com/snowball.aspx?country=us

Blogs
Debt Kid http://www.debtkid.com/
We’re In Debt http://wereindebt.com/
Free Money Finance http://wereindebt.com/