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Ask Dave

Attack Live Debt or Dead Debt?

Amanda is working on Baby Step 1, and aside from student loans, all of her debt is in collections. Should she start paying on the student loans first or start attacking the bad debts?

QUESTION: Amanda on Facebook is working on Baby Step 1, and aside from student loans, all of her debt is in collections. Should she start paying on the student loans first or start attacking the bad debts?

ANSWER: Normally, when I find people who have some live debt and some debt that is already in default, I tell them to clean up the live debt first with a debt snowball, working your debts smallest to largest, all the payments are minimums, and you attack the smallest debt with a vengeance and work your way down. Then make a list on the debt that is “dead debt” or defaulted debt, smallest to largest, and wake up one at a time and go ahead and settle with them and get it in writing and wrap that one up and move along.

In your case, you have one live debt, and it’s a large student loan, so I probably would pay minimum payments on it and work a debt snowball listing all of your debts—the ones that are in collections—smallest to largest. Let’s clean up the little one first, then the next little one, then the next little one. I’m going to walk you right down that process.

If you haven’t ever heard of the debt snowball method, here’s what it is. The debt snowball is where you list your debts smallest to largest, pay minimum payments on everything but the little one, and you attack the little one with a vengeance. You squeeze every dime out of your budget you can, and you attack that smallest debt. You stop all investing and all saving at this stage of the game. This is all of your debts except your home. You really get in attack mode. I mean you sell so much stuff the kids think they’re next. You name the dog eBay and put the cat on Craigslist. You go crazy here. We’re going scorched earth. You don’t see the inside of a restaurant unless you’re working there. You go nuts.

Why do we list them smallest to largest given that I’m a math nerd? If we were doing math, we would not have credit card debt, and we wouldn’t be in collections. This hasn’t got anything to do with math. This has got to do with behavior modification. It’s got to do with changing your behavior. Personal finance is 80% behavior. It’s only 20% head knowledge. We list the debts smallest to largest because you need some quick wins. You need some confidence-builders, some faith-builders. When you pay off that smallest debt, you draw a red line through it, you go, “Uh huh.” Then you draw another line through the next one. Yeah! Then you draw another line through the next one, and you’re like, “Yeah, this is working! Wow, I’m going to do this! I’m getting out of debt, man!” You go crazy because the more success you have, the more confidence you have that this is going to work, the more likely you are to stay on the plan.

I’ve been teaching that for 20 years. Literally millions—tens of millions, honestly—of Americans have used the debt snowball as instructed by Dave Ramsey. I’ve always had my critics. There are a lot of things I don’t know anything about, but this I know a lot about. This works—so much so that a couple of professors at Northwestern University decided to study this. They published their study in Time magazine, saying that it turns out, as they studied it, the likelihood is if you work the smallest debt to the largest, you’re going to stay on the plan and the likelihood is you’re going to be successful much more often than if you work the highest interest rate to the smallest, because this is not about math. This is about completing a task and changing your life. It’s more than math. It’s inspiration. It’s motivation. It’s hope. It’s getting rid of this sense that I’m a rat in a wheel and all I do is run, run, run, get nowhere, fall over, and die. You need traction. You need some small successes, which lead you to large successes. You’ve got to do that. That’s why the debt snowball works. If you want to learn more about that, you can check out our website at You can check out Financial Peace University. It’s taught in about 10,000 locations. Of course, you can always check out the book The Total Money Makeover—our New York Times best-selling book. This stuff will walk you right through it—right out of debt—through the process of this whole managing and handling money thing.