I get a lot of email from readers (and from spammers) about so-called debt elimination programs – organizations that promise to “eliminate” large portions of your debt and leave you debt free in a certain number of years. Do they really work, or is it a scam?
I looked into several of these via “free trials” and almost every one of them was essentially the same – a compilation of decent personal finance advice crammed together in the framework of a plan. Most of them included a computer program to create a simple monthly budget for you and also tell you which debt to pay off first and how much to pay on that debt – essentially a computerized version of Dave Ramsey’s “debt snowball.”
Do these programs “eliminate debt”? They sure do, but probably not in the immediate “debt free” sense that you’re thinking. Instead, they put you on a very hard debt repayment course that’s designed to have successes along the way so you can feel like you’re making real progress, they usually tell you to call creditors and negotiate with them, offering some basic techniques for doing so, or encourage you to visit a credit counseling service.
These programs also claim to raise my net worth? Whenever you start paying off debt, your net worth will begin to go up over time – or at least the downward slide will begin to slow. Let’s say you have $20,000 in assets, make only $150 a month, and you have $10,000 in debt at 18% interest. Your net worth is $10,000, but you have to make payments of $150 every month just to stay in place – and this situation will continue forever. If you instead make payments of $300 a month, the first month will see no difference in your net worth – your assets will total $19,850 and your debt will total $9,850, giving you a net worth of $10,000 again. But the following month, that $300 will pay more principal and less interest than before – your debt is smaller and thus doesn’t earn as much interest – and so after the second month, your assets would be $19,700 and your debt would be $9,697.75. Your net worth is thus $10,002.25 – it’s gone up just because you’re taking care of your debt. The increases in net worth occur because of the decreases in debt.
This sounds harder than the ad makes it sound. It is – there is no legal method of getting completely free of your debts. These plans are just like any such “life transformation” plan – they work spectacularly well if you’re truly committed to the change, but they aren’t worth the paper they’re printed on if you’re not. Even more importantly, such programs are usually made up of information that’s available for free – or close to it – elsewhere.
Here’s the scoop: if a program like this is appealing to you, instead just go to the library and check out Dave Ramsey’s book The Total Money Makeover. The meat of these debt elimination programs can be found in that book – and the book can be checked out for free at your library instead of paying the exorbitant cost of the debt elimination program.