» Dave Ramsey’s Financial Peace University: Week 5

Last week – dumping debt

Last week was week 4 in Dave Ramsey’s “Financial Peace University“. The lesson for week 4 was another good one, this time focusing on dumping all of your debt using the debt snowball! A few of the important points about how to dump your debt:

Quit borrowing more money. Don’t take on any more debt.
Cut up credit cards. Go cold turkey. Credit cards can mess up your budget on many levels.
Sell stuff. You have more than you need or use, so sell it and put the money towards debt!
Get an extra job. Take side jobs to accelerate paying off your debts. This can be temporary.
Debt snowball. Pay off the lowest debt first, then use the amount you were paying for that debt and roll it over to the next debt.

What was really stressed in this lesson is the need for your debt to be gotten rid of, because the borrower is slave to the lender. When you get rid of your debt you’ll be able to put your money to work for you – instead of for the people you owe, and wealth building can begin. Read the entire lesson here.

This week – Credit Sharks in Suits!

This week our class jumped into the topic of how to check and clean up our credit report and deal with collection agencies. Knowing how to deal with creditors can give you more confidence when working on your debt snowball that we talked about last week.

Some key points from this week’s lesson:

If you are unable to pay the minimum payments, use the Pro-Rata plan (see below).
Always budget for your necessities before paying off any debt.
Check your credit report for errors at least every two years.

Unable to pay the minimums? Use the Pro-rata plan.

Dealing with debt can be a very stressful situation, especially when it has gotten to the point where creditors are constantly calling you, trying to get you go make payments. This week’s lesson talks about how to deal with creditors when you’re coming up short.

If you’ve gotten into debt to such a degree that you’re not even able to pay the minimum payments on your debts, you need to come up with a plan where you are still paying some amount so that they know that you’re trying.

When you’re coming up short on the minimum payments, Ramsey suggests paying them on a Pro-rata plan. In other words, he is suggesting that you pay everyone a pro-rated amount, based on the amount you owe them, and the amount you have (total) to pay on all the bills.

For example, let’s say you have three debts, one of $500, one of $300, and one of $200 for a total debt of $1000. If the minimum payments for that month are for $50, $30 and $20, but you only have $80 left over after paying for essentials, the pro-rata plan would have you take your debt, figure out what percentage of the total debt it is, and then assign your money according to your debt’s percentage of the total debt.

So in our example, the $500 debt would get a $40 payment (50% of $1000), the $300 debt $24 (30% of $1000) and the $200 debt would get $16 (20% of $1000).

When you’re sending in your pro-rated payments, make sure to send a letter of explanation along with the check, telling them why you’re temporarily sending in less than the minimum. Give them a copy of your debt Pro-Rata plan showing all your debts, and the amounts you’re paying.

Some of the creditors may call and complain, and threaten to sue you, but making regular payments and staying in communication with creditors goes a long way towards keeping you out of court. As long as you’re making some sort of payment, most will not sue – although some will tack on extra late fees and other fees.

While this plan may help, it won’t solve the root of the problem, which is too much debt and not enough income. To solve that problem you may need to take on an extra part time job, or as Dave Ramsey says, “start selling so much stuff the kids think they’re next!”

Pay for the essentials first

Dave Ramsey told a story about a woman at one of his seminars who came up and told him that she hadn’t eaten in 2 days because she was paying some of her debts first. Ramsey stressed in the lesson that you should always take care of your families essentials first – food, shelter, transportation and clothing. The creditors come second.

If you can’t come up with the payments for your creditors, put them on a pro-rated payment plan as discussed above, and as stated – stay in contact with them. The better you are at doing that, the less likely they are to take you to court.

Dealing with creditors and collection agencies

When you’re trying to find your way out of debt, and you’re constantly getting collection calls it can seem like the bill collectors can do whatever they want. They can call you whenever they want and say just about anything just to get you to pay.

Dave Ramsey reminds us that there are certain rules that collection agencies and creditors have to follow when they’re contacting you. If a bill collector oversteps the bounds of the law, you can take action. The federal Fair Debt Collection Practices Act, or FDCPA, prohibits certain debt collectors from engaging in abusive behavior. Some of the things they can’t do include:

Call you repeatedly or contact you at an unreasonable time (the law presumes that before 8 a.m. or after 9 p.m. is unreasonable).
Place telephone calls to you without identifying themselves as bill collectors
Contact you at work if your employer prohibits it.
Use obscene or profane language.
Use or threaten to use violence.

For a more complete list go here.

Under the FDCPA, you have the right to tell a collection agency to stop contacting you. Simply send a letter stating that you want the collection agency to cease all communications with you. All agency employees are then prohibited from contacting you, except to tell you that collection efforts have ended or that the collection agency or original creditor intends to sue you or take advantage of some other legal remedy.

Ramsey suggests not doing this, however because often it will result in you being sued. Instead he says to tell them that they can call you once every two weeks, and that you’ll talk to them on that schedule. Any sooner and you’ll hang up.

It’s important to stay in contact with your creditors, or you may be headed for trouble.

Check your credit report

Stats have shown that over 50% of the credit bureau reports have errors. That’s a lot of errors!

In 1977 the Federal Fair Credit Reporting Act was passed. It deals with how credit bureaus, creditors and consumers interact. The FACT Act amendments to the Fair Credit Reporting Act requires the nationwide credit bureaus provide consumers, upon request, one free personal credit report in a 12-month period. You can check out your free annual credit report at the central source online at www.annualcreditreport.com .

Check your report every year or so, and make sure that there isn’t any strange activity on your report (which could mean fraud). Make sure that your information is correct, credit accounts that should be closed in fact are closed. If you see anything as it shouldn’t be, report it to the credit bureaus immediately!

Stopping the calls and the credit card offers

When you’re trying to get out of debt the last thing you need is to have telemarketers calling you and companies sending you offers in the mail for more credit. Stop those calls and that annoying mail.

Use the government’s National Do Not Call Registry to protect your number from unsolicited calls.

Stop all of the “pre-approved” credit offers that you get in the mail! You can have the credit bureaus turn away companies who check your credit report in order to send you unsolicited credit offers.

Next week

Next week wehave a lesson entitled “Buyer Beware” which deals with common traps to avoid when buying things. See you next week!

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LINKS:
Dave Ramsey’s 7 Baby Steps @ M-Network Blogs
ChristianPF.com – How to make a budget

Tagged as: Dave Ramsey, Financial Peace University, FPU