Q. My wife and I are considering obtaining help with our debt by hiring a company that offers a debt management program. We both take responsibility for letting things get out of hand and realize we need to take some action and change our spending habits. Do you think such programs are worthwhile and if so, what should we look for when deciding on a company? We’ve received solicitations from three companies and they all see a little different in the type of plans they offer and the fees vary. We really don’t want to declare bankruptcy but we are in over our heads in debt.
A. I’m sorry to hear about your debt overload; that can be very stressful and harmful to a relationship. On the positive side, it sounds like you are both on the same page and ready to make some changes.
You may want to take a look at the National Foundation Credit Counseling web site (nfcc.org) or call them (800-388-2227) and see if this non-profit agency can be of assistance. Compare what assistance they can provide with the other companies you are considering. You could also try to work directly with your creditors but some will only work with debt management programs and concessions obtained by a debt management program may be better than what you can obtain on your own.
Some may suggest a debt settlement and some a debt consolidation. There are pros and cons to each solution. With a debt settlement, they will negotiate with your creditors to settle a debt for less than what is owed. The impact on your credit score/report will be significant since you will not be paying the full amount of your debt. This will remain as part of your credit history for seven years. The IRS may count whatever amount of debt is forgiven as income and require you to list this on your tax return.
With debt consolidation an effort is made to combine debts from several creditors and then have one loan which is used to pay each creditor. This simplifies your bill paying process. You make one payment and the agency makes the payments to your creditors. The consolidated loan is usually at a reduced interest rate which results in a lower monthly payment. Your debt is not forgiven or reduced.
Whatever you decide, devote some time and effort to developing a cash flow statement. This is the first step to gaining control of your spending. Determine where all of your money comes from and where it goes. Track your income and expenses so that you have an accurate picture of what you are spending. Prorate any annual, semiannual or quarterly income or expenses such as bonuses, insurance premiums or property taxes to monthly amounts. For example, if your annual automobile insurance payment is $1,200, divide this by 12, this is a $100/month expense. Set the money aside every month, don’t just wait until the bill arrives.
Certain expenses can’t easily be changed, these are called fixed costs such as your rent or mortgage. Other expenses are more flexible, these are called variable costs such as dining out or clothing. Take a look at your final income figure for each month and subtract it from your total expenses. If you have more income than expenses you need to direct this “surplus” to pay off debt or into a saving/investment plan before it disappears. If you are spending more than you are earning you need to trim expenses and or find a way to earn more income.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624