Advice from Nashville's leading Financial Aid Advisor Dave Ramsey
Dave Says
By Dave Ramsey Author of:
Financial Peace and
The Total Money Makeover
"What are Debt
Counseling Companies?"
Dear Dave,
I’ve lived by your financial philosophy my whole life and can go to bed at night
and sleep soundly. However, I have a very good friend who has about $30,000 in
credit card debt, an $80,000 second mortgage and a car loan. She makes about
$70,000 a year, which isn’t a lot by California standards, but not a bad living.
Now she’s in way over her head with these debts and she’s considering using a
credit counseling service to help. I’ve explained to her that this will hurt her
credit, but she doesn’t see an alternative. They want her to set up a special
account into which she will make monthly payments and they’ll use that money to
pay off her debts in about 30 months. They’ve told her that they can negotiate
her credit card debt down to almost half of what it is now. There is also a fee
of about 18% for the credit counseling service built into this payment schedule.
I’d like to help her. What is your feeling about her doing this deal?
Frank in Anaheim, CA
Dear Frank,
I wouldn’t do this deal. I think it’s a really bad idea for several reasons.
First, as you’ve said, it destroys her credit with regard to buying a home.
Almost any lending institution she goes to will count her using a credit
counseling service as if she had filed a Chapter 13 bankruptcy.
Second, she will literally have her credit destroyed. That’s how they get her
the negotiated discounts on the credit card debt. Credit card companies don’t
settle on your debts because your payments are on time. Nobody settles debts
that are current. The credit counseling company will withhold her credit card
payments until her account is 90-180 days past due. Then they will contact the
lender and negotiate to settle on this bad debt. So, they deliberately create
bad accounts and destroy her credit. It’s the ONLY way they can get a settlement
like that.
Also, be warned that some of these credit counseling services are a scam. And
some of those scam companies go so far as to request a power of attorney, which
these people in debt are either naïve enough or desperate enough to sign over to
them.
No! Your friend needs to handle this herself. The best way she can do this is to
create a budget every month that makes her money behave. She needs to get extra
jobs and sell a bunch of stuff. She probably even needs to sell her car and buy
a cheap used vehicle. She’s going to need to make some tough decisions to free
up her cash flow and clean up this mess. You said she makes $70,000 a year. The
average income in North American is $40,000. What if she lived on an average
income and used the balance to pay off her debts? She could be debt free in a
couple of years.
This is all about lifestyle and living on a plan. Ten years down the road,
she’ll be much better off cleaning this up herself rather than having someone
else do it for her.
-Dave
To Find More Nashville About.com Information About Dave
Ramsey Financial Advice (including previous articles) Click Here
To Visit Dave Ramsey.com Click Here
*Disclaimer: Questioner's identities have not been verified by Dave
Ramsey.com or
Nashville About.com.
| 