Your Money_ The Missing Manual - J. D. Roth [36]
With a DMP, you pay off your debts by making monthly payments to the credit agency you're working with; they then send these funds to your creditors. Some creditors may be willing to reduce interest rates or waive fees if you're using a DMP. In a lot of cases, if you show a good faith effort to work with them, they'll work with you.
Note
A debt management plan can ding your credit score (see Your Credit Score), but it's not a permanent penalty. Since you shouldn't be taking out new lines of credit if you're in this situation anyway, that's a small price to pay to break free from the chains of debt, don't you think?
One added benefit of working with a credit-counseling agency is that they'll act as the go-between for you and your creditors. If you're being hounded by debt collectors, the agency will take the calls for you—how cool is that?
Credit counseling isn't always free, but some agencies do offer their services for low (or no) fees. For more information, contact the National Foundation for Credit Counseling at 1-800-388-22727 or www.nfcc.org, and check out the box below for tips on selecting a counselor.
Your Money And Your Life: What to Ask a Credit Counselor
Each year, the U.S. government publishes the Consumer Action Handbook (CAH)—available online at http://consumeraction.gov—which recommends asking the following questions when searching for a credit counselor:
What services do you offer? Look for an agency that offers counseling and classes, not just a debt management plan (Debtors Anonymous).
Do you provide free information? Reputable organizations should have free info to help you get started.
What are your fees? These should be low. The 2009 CAH says that a typical setup fee is $10; if you're asked to pay a lot more than that, you might want to try somewhere else.
How will the debt management plan work? Will it include all your debts? Will you get regular progress reports?
Is it possible to get creditors to lower or eliminate interest and fees? If the counselor says yes, you'll need to follow up with your creditors to verify.
What happens if I can't afford to pay? Go elsewhere if the agency won't help you unless you can pay.
Can you help me avoid future problems? Learning to avoid debt in the future is at least as important as drafting a debt management plan.
Are your counselors accredited or certified? Be wary if the firm isn't affiliated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies.
Finally, the CAH notes that you should be sure you get a contract: "All verbal promises should be in writing before you pay any money."
Financial Peace University
There's been a lot of Dave Ramsey in this chapter, and there's a reason for that: Ramsey is the guru of debt reduction. His advice has helped hundreds of thousands of people—including me—to stop spending and start living debt free.
Ramsey's company, The Lampo Group, offers a 13-week course called Financial Peace University (FPU) that provides hands-on training in debt reduction and money management. FPU takes 2 hours per week and costs about a hundred bucks for the entire course. The classes teach you how to save, budget, invest, and—of course—pay off debt.
One thing to know about Financial Peace University: Ramsey is a devoted Christian, so his program incorporates Biblical principles and the classes are usually held at churches. For many people, this isn't an issue, but it might bug you. If you're a non-Christian considering FPU, you may have to just deal with the religious language. Or you can use the class finder at http://tinyurl.com/FPUfinder to see if any credit unions or nonprofits in your area are offering the course. There's also an online version of the class available: http://tinyurl.com/FPUonline.