The Truth About Debt Management

from daveramsey.com on 25 Oct 2004

Myth: The debt management companies on TV, like Consumer Credit Counseling Service, will save me.
Truth: You may get out of debt ... but only with your credit trashed.

Debt management companies are springing up everywhere. These companies help "manage" your debt by taking one monthly payment from you and distributing the money among your creditors, with whom they've often worked out lower payments and lower interest. This is not a loan as with debt consolidation. Sometimes people get the two confused. However, because Americans are up to their eyeballs in debt, the debt management business has become one of the fastest-growing industries today.

Companies like Consumer Credit Counseling Service can help you get better interest rates and lower payments, but at a price. When you use one of these companies and then try to get a Conventional, FHA, or VA loan, you will be treated the same as if you had filed Chapter 13 bankruptcy. Mortgage underwriting guidelines for traditional mortgages will consider your credit trashed, so don't do it. Real debt help is found only in changing your behavior.

In short, debt management companies are out. Hard work is in. Change your financial behavior and change your life—for good. True debt management is about one thing: you controlling your money.

Real Debt Management

The good news is that there's not some magical, mystical formula to good debt management. The solution is common sense and having a plan for your Total Money Makeover. Grandma's simple way of handling money. Good debt management is 80% behavior and 20% head knowledge. It isn't rocket science as some debt managment companies try to make you believe.

Is it easy? No. In fact, it's really hard most of the time. But it's worth it. It's amazing to see people change their lives through simple determination and having a plan that works every time. Once you have areal debt management plan in place, its only a matter of time.

We have people every week email or call us about how they have paid off $10k, $20k, sometimes even $100,000 in debt. Now, you may be thinking, "Yeah, right. They must be making six figures to do that." NO! These are just people who are serious about getting out of debt. Many of them are making $30,000 to $50,000 when they decided to be debt free. It's all a matter of attitude. We call it "gazelle intensity."

Get on a plan to beat debt with the Total Money Makeover.

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Dear Dave, I have been trying to get out of debt for years, I have recently remarried, I am 55 years old and my wife is 51. We have a $400 house payment and a $400 truck payment. We filled our taxes this year with a total income of $50,000. My wife had about $30,000 in credit card debt 5 years ago. She now owes about $3,000. We have in savings ( three different joint savings account and 1 IRA) about $9,000. My truck is a company truck that I get paid an extra $4.00 an hour to use and it pays of in August 2010. We bought the house 3 years ago on a 5 year note.With my truck payed of this year, her credit card debt will be gone by Christmas. Also my Wife works part time as she is still in college to be an Elementary School Teacher. My hours vary day to day as I am a land surveyor. I make 75% of the household income. I thought about a second job but nobody wants to hire a man who cannot be there at the time he is needed. I work some days sunrise to sunset and others only 6-8 hours. I work a saturday or two each month, it depends on the surveys we have in and how soon they are needed. Except for 1 or 2 Sundays a year, I don't work on Sunday. And I never know for sure what days I will be off, usually Saturday and Sunday, but sometimes it could be a weekday and work the weekend. Also the reason for 3 savings accounts is that I move the majority of the money around to which ever one has the highest interest. Right now 1 pays 1.5% interest, that's where 80% of the money is. the second pays 1.05% interest and that's where15% is. and the third is required by my bank (Randolph Brooks S&L) to have a checking account, it has the remaining 5%. I bring home about $3,000 a month. With the bills payed I try to put $300 to $600 a month in the savings. I cannot at this time add to my IRA whenever I want. After it matures I plan to move it to the S&L where I can. We eat out once or twice a month. Usually at a place that it cost us about the same as buying and preparing the food ourselves. I've always been told that I am very frugal. I occasionally have to dip into the savings to repair my truck or the home (it is a 900 square ft. mobile home built in 1979). It reminds me of the money pit on a tiny scale. I do 90% of the work on it myself as I come from a long line of carpenters (on my mothers side of the family). So tell me what you think, I listen to your show and everybody that calls in, it seems, makes 2-4 times as much money as I do. The reason I don't take the savings and pay of every thing is that if my truck breaks down and I cannot afford to fix it, I also don't work! Looking forward to your answer. James E.Phillips Canyon Lake, Texas
James E. Phillips March 13 2010 7:46 PM

Dave. I have been in a debt relief program where I am giving $700.00 per month to a noteworld account to be used to negotiate with my creditors. The company name is Global Debt Management LLC Is this a legitamate company and can they do what they say they can?? Plesae let me know asap before I give them any more money. thanks. Bob
bob March 12 2010 1:02 PM

Before I learned about the Financial Peace University Ibegan working with a debt resolution company to get rid of my credit card debt. The company has done a great job of managing the collection calls and last week because I could not settle with one they served me a summons today? It says i have 20 days or it will default? What does this mean? Any suggestions on what I should do next. I am panic struck.
cindy March 06 2010 11:03 AM

I am handling my mother-in-laws finances and trying to get her out of debt. My father-in-law passed away and she gets his retirement which is about $36,000.00 per year and and about $5,000.00 per year in SS widows benefits. She started gambling and incurred about $45,000.00 in credit card debt. She has already sold her house, is making payments on a car for at least another couple of years, and I am barely making the minimum payments on these CC debts. I think she has stopped gambling or at least not using her credit cards to do it because I have all but one of her cards and her checkbook, so if she is it is from the little bit of cash I give her to try to eat on. She is in her 60's and she is still capable of getting a job, but does not really put forth an effort to get one. I am considering putting her CC debt in to a Debt Management Plan or a Debt Settlement Plan to get these debts paid off in 3 to 4 years. At her age and possible gambling problem would it be such a bad idea to hamper her credit rating for a while in order to get rid of this debt?
Travis February 24 2010 5:47 PM

Dave, I would disagree that Debt Management Plans are bad for your credit. First of all, you are not going to be qualified for a home loan anyway if you are late on payments and struggling to pay credit debt. Only people with sufficient cash flow and a low debt to income ratio are going to get a mortgage these days. Getting interest rate relief and possibly lower monthly payments on debt payments is what allows a person to pay off their debt in a few years. Couple that with good budgeting can help mitigate the fact that most of use have lower incomes these days. If a debt management plan helps you pay off your debt, then you have more cash flow - which is really the whole problem in the first place. With a sustained amount of time on a debt management plan, you don't have late payments anymore and your credit owed decreases in ratio to your max credit limit. These factors improve your credit score. A good NFCC accredited nonprofit consumer credit counseling agency will advocate financial education and provides budgeting recommendations when offering a debt management plan.
Aaron February 16 2010 2:26 PM

we are considering debt management so we can get out of debt in 3 years. Hopefuly sooner but right now that is what we can afford. We like the concept of the snowball but we wouldn't be out of debt for a long time and after the intrest it will take us forever. We own our home with a morgage but we are hoping we can live debt free when this is all said and done so we don't need to worrie about the bad credit.
debi February 14 2010 12:38 PM

Dave, I really do understand your point about Debt Management to a degree but if you have stopped spending and have high interest rates because you maxed out your CC's what better way to get the interest rates lower than to go thru a Debt Management firm. Sure they will charge a fee. Nothing is free. If they are a legitimate company and I'm truly serious about becoming CC debt free what better avenue to take if I can't avoid the minimum monthly CC payments due to the high interest rates and understanding that I was financially immature in not being more financially responsible. Is that not a rational way to look at this?
Chip February 08 2010 6:27 PM

Have $100,000.00 in credit card debt and don't have enough monthly income to make minimum payments. Currently 120 days plus late on payments. Any advise? Thank you...
Tom January 28 2010 6:54 PM

Regarding the comment on Nov. 26., this just goes to show how much of a slave state we are heading toward. Credit records shouldn't have anything to do with the job application process. 'Sorry, you couldn't pay your bills because you lost your job during the economic crunch- that is unacceptable.' What comes next, credit defaulters being labeled 'financial terrorists' and deportation?
CW Schaeffer January 03 2010 8:15 PM

I recently had to move my dad into assisted living out in CA. I live in TN and doing things long distance is making it very difficult. I had to take his car away from him as it was too dangerous for him to keep on driving. Now I'm stuck with this car & am not sure what to do with it. Try & sell it long distance or have the bank come & reposses it. He's 88 yrs & has been driving a 2006 Mustang. I have thought of having bank come to reposses it. How much will it affect his credit (after all he's 88 yrs old and will not really need and credit)? He can no longer afford the car and the insurance. I would appreciate and help on this matter. Thanks you and may God continue to bless your ministry.
Pamela Norton-Bryant December 27 2009 5:33 PM

If you are seeking helping with debts to lower rates: Its because 1. You are struggling and have a lot of debt. 2. Your high rates reflect that the credtiors see you as a risk so they ware trying to get as much from you now before you stop making payments. Sooo why would anyone in this situation want to apply for a Mortgage loan?? Once you finish paying your debts on time for atleast 6 months most creditors reinstate your account in good standing if you came into it past due: it removed all fees and lowers rates and payment Hence making the Debt Managable. Once you have a 0$ there is no evidence on your credit you did it from a Debt Management Plan. Fiing a Chp13 stays on your credit for 10yrs and you are not paying 100% of your debt: On a Debt Management Plan you are paying 100% of your debt: you can stay current and you can pay debts smallest to largest just by telling them where you want your extra payments to go to. So its not a super scary thing to do: This is the only thing I disagree with Mr. Ramsey on: If you can handle it your self great if not this plan will make managable. You still of course have to work on budgeting and have goals and make behavior changes: a Debt Management you have full control of this and a help from Counselor.
SamIam December 24 2009 6:17 AM

We were considering doing debt management due to my husband having a stroke last week.Our income has taken a huge dive and we don't know what else to do. Would it be better to contact each one of our creditors and ask for a hardship plan? How does that differ from a debt management plan?
Linda Mishler December 17 2009 8:11 AM

Actually, if you have made your payments on time for 12 months in a consumer credit counselling program you can get an FHA mortgage. It isn't as bad as a bankrupcy.
Jonathan December 01 2009 10:46 AM

Hey Chris, Think about it. Having good credit is more than just for securing money for a loan. Prospective employers may enquire as to the soundness of your creditworthiness, depending on the job you are going after. Some insurance companies can often be interested in your credit, they want to know if you are responsible enough to pay your premium EACH and EVERY month! And if you are ever interested in buying a house, you will need good credit for a loan to purchase the home, so you can pay it off in 6 or 8 or 10 years, because you are debt free, other than the house, which is an "acceptable" debt nowadays. But not for long, get it paid quickly, and be COMPLETELY debt free! Good luck Chris...and may God Bless your efforts!
Michael O'Brian Sr. November 26 2009 7:21 PM