In this final installment of the Financial Peace University summary, I’ll cover credit collection practices and will briefly address the spiritual side of managing your finances. This series of summaries about FPU has taken much longer to complete than I originally anticipated. The information was so good I couldn’t pack it into just a couple of posts. I’m glad we’re ending with lucky post #7.
Credit collection practices
In week 12 of Financial Peace Universtiy, Dave Ramsey addresses credit collection practices and how to create a plan to deal with creditors. This is not an area I’m familiar with so I can’t add much of my own opinion. Hopefully those of you dealing with creditors will find this information useful. If you’ve had experience dealing with creditors, please post your experience and any advice in the comments.
It’s better not to go into bankruptcy, but rather to create a plan.
Dave’s first piece of advice is that you’re better off dealing with creditors than going into bankruptcy. If you have a clear plan and communicate that to your creditors, you can make it through the experience.
Collectors are not professionals. Don’t let them manipulate you into thinking they are.
Dave mentions that the average turnover for a collections agent is 90 days. It’s literally a revolving door. This helps you put things in perspective about who you’re talking to. It’s not an intimidating professional in a suit and tie, but more likely some tween in a tee shirt and jeans who won’t even be around next month.
A collector agent’s first rule is to evoke emotion (fear, anger).
Collection agents use scare tactics to manipulate you by evoking anger and fear. If they can get you to react strongly, you’re more likely to take action. Beware - This will lead you to make non-logical decisions that won’t be in your best interest. For example, in the heat of the moment, you may reason “I’ll pay this off to show you and get you off my back.”
Take care of the “four walls” before paying creditors.
Take care of your necessities before paying creditors. Dave defines necessities as the “four walls” - food, shelter, clothing, and transportation. In a previous session Dave tells a story about when he had creditors coming after him. He and his wife ordered their budget according to needs and drew a line on the paper after the “four walls.” When the creditor called, Dave told them “I’m sorry, you’re below the line.” The creditor asked “well how do I get above the line?” Dave replied “You be nice next time you call.”
Creditors have rules dictating how they can act. Don’t let them break those rules.
In 1977 the government passed the Federal Fair Debt Collection Practices Act dictating how collectors can behave.
Here are some things to look for:
- Creditors can only call between 8 AM and 9 PM.
- You can send a certified letter to your creditor with a return receipt stating they are not allowed to call you at work. If they do so, they will then be violating federal law.
- They can’t use gestapo tactics. Dave tells a story about a collection agent who sat in the debtor’s driveway and threatened him when we got home. If the collection agency is using such tactics you can send a cease and desist order. But be warned, doing so could trigger a lawsuit.
- No collector can confescate your bank account without suing you. If they say they can, they are lying. However, they can do this with student loans because there is such a high default rate.
Create a plan for paying your bills.
The main way to deal with collection agencies is to create a plan and communicate it to the agencies.
If you can’t pay all your bills:
- Take care of your needs first
- Create a Pro-rata plan in which you pay your creditors as a percentage of how much debt you have with that company. For example, if you owe one creditor 25% of your total debt and another 75% of your total debt and you have $100 a month to pay down debt, you would send the first creditor $25 and the second $75.
- Send a cover letter with copy of your budget every month along with your payment.
Communication is key in dealing with creditors. If they see you’re making progress and have a clear plan, they’ll be much more confident that they’ll get paid and will be less likely to pester you.
The number one catalyst of filing bankruptcy is pressure from collection agencies. If you communicate excessively they probably won’t sue (although they could). A proactive approach is the best.
Settling debt for less than the full amount.
If you don’t have enough to pay a debt you can ask for “settlement in full.” This means you offer to pay less than the full amount you owe immediately if they will consider the debt paid. If they agree, make sure you have a written agreement. This is a less desirable approach since you should ideally pay whole debt (you do owe it). It also will show as a gray mark on your credit report (which is better than showing as a black mark). Also, if you receive a settlement in full, the amount of the debt you don’t pay off is taxable income.
Managing your credit report.
Here are some useful tidbits to help you manage your credit reports.
- Financial accounts are taken off your credit report every 7 years from last report. Bad debts stay on your credit report because they continue to be reported. The sooner you pay them off the sooner they will be removed.
- Keep track of your credit report. 50% of people have errors on their credit report. 37% have major errors that can make it hard to get a job or loan. Check your credit report once a year. You are entitled by law to one free credit report a year from each of the three major credit reporting companies: Experian, Equifax, and TransUnion. Get your free credit reports at AnnualCreditReport.com.
- The credit bureau is required to remove inaccuracies within 30 days of you reporting it unless they prove the inaccuracy is correct. If they don’t remove the inaccuracy you can have them take off the entire file (Dave wasn’t clear on this point but it sounded like you could actually have the entire financial account removed from the record).
- You can contact the credit bureaus to prevent you from receiving pre-screened marketing offers from financial institutions. You can call each company and follow up with certified mail to each of 3 credit bureaus. If you request a block by phone it lasts for two years. If you request a block in writing, it lasts forever.
The spiritual side of managing your finances.
Dave wraps up Financial Peace University in week 13 by talking about the spiritual aspects of managing money.
I know many people give Dave a lot of flack for talking about spiritual matters, but it’s hard to deny the impact of having a charitable mindset. I personally have had many positive experiences giving funds for charitable causes and have seen miraculous results. If nothing else, the idea of sharing your wealth is healthy from a psychological perspective.
Dave points out that we shouldn’t just try to gain more money for the purpose of holding on to it. Money is just a small piece of life and isn’t the source of happiness. By using money to help others, we can keep money in its proper place and maintain a healthy attitude towards material gain.
Giving money to worthy causes helps our relationships and increases our wealth.
Dave advocates giving a portion of your income to charitable causes. This helps you release your tight hold on money and helps it flow to those who need it most, including to yourself in times of need.
We are happiest and most fulfilled when giving and serving. Giving is:
- A reminder that the lord owns all. We are just stewards.
- Praise and worship. We show our attitude towards God when we share our money with others. It’s a form of praise.
- Spiritual warfare. Giving freely of your wealth can spiritually protects you against both spiritual and temporal harm.
Dave offers the following guidelines for sharing your wealth.
- Give 10% of your income
- Give off top. Budget your charitable giving first. Don’t wait until you’ve budgeted all your categories or you won’t have anything left.
- Give offerings in addition to tithes. When possible give above and beyond the 10% tithing.
- Never give with the motive of receiving in return. If you give with the wrong motive, you won’t receive the corresponding blessings
- Financial peace is about understanding. By putting money in the proper place and perspective, you can obtain financial peace. It’s not about how much money you make or how much “stuff” you have.
Today I went to lunch with a very wealthy person. I don’t know exactly how wealthy , but based on his frequent trips to Maui, the fact that he earns a free plane ticket every month through his frequent flier points, and the fact that the other day he decided to go out and buy a truck just because he’s never had one before, there’s good reason to believe he’s close to a seven-digit earner. As I talked with him, it raised a lot of questions in my mind about how managing my finances will change as my wealth grows. If I were a millionaire would I still need to budget? Would I still want to track all my spending? Would I still need to negotiate with my wife about finances? It seems logical that with an income over $1,000,000 a year you wouldn’t need to plan as vigorously. But in the end thats a lie. Millionaires that manage their money irresponsibly can quickly lose it all and fall from grace (MC Hammer comes to mind).
Cafeteria plans can save you a lot of money and yet are one of the most under-utilized benefits that many employers offer. One of the reasons they’re neglected is because it can seem so overwhelming to determine how much money to set aside for medical expenses. Having just gone through the process ourselves, we wanted to share a brief overview of how Cafeteria Plans (FSA) work and how to optimize your participation. 