13 Drowning in Debt

Today, there are three kinds of people: the have’s, the have-not’s, and the have-not-paid-for-what-they-have’s.

—Earl Wilson

I know something about paying off toxic debt. Years ago my husband and I paid off more than $100,000 of wicked, toxic debt. We didn’t have a particular plan, counsel, or guidance in how to go about doing it. We just kept working at it, and 13 years later we reached our goal of $0 debt.

Yes, it is remarkable and I am proud that we did. But the way that we did it wasn’t smart. It cost way more than it should have in interest alone. The problem is we spread it out far too long—13 years! If I’d known then what I know now, we could have been out of debt in five years by applying a different method of paying it, and we could have kept a lot of money we ended up paying out in interest.

There is not a single “right” method for repaying toxic debt. Recently, I was assigned to write a feature story for a popular magazine. I interviewed five women who had paid back significant sums of toxic debt. Each one used a different method.

One sold everything of value that she owned and used the proceeds to pay her debt.

Another introduced an extreme austerity program to her family of eight and laid down the law. They didn’t eat out for two years. They locked up the clothes dryer, hanging the clothes inside on clothes lines. They stopped watering the lawn and lowered their water bill. Her list of extreme measures was certainly attention-getting.

Another of my interviewees sold her home to pay her debt then rented a home one-third the size.

As I pondered these real-life stories, it dawned on me that while each woman used a different method, all of them reached their goal. They were all debt free.

From that I concluded that any method to pay off toxic debt will work. Eventually. The unknowns are the time it will take and how much additional interest you will pay by spreading it out too far. But still, the lesson was not lost on me: as long as you are going in the right direction, you are focused on your goal, and you choose to think about it most of the time, you will get there. You will succeed. Guaranteed.

One of the interviewees turned out to be a follower of my Debt-Proof Living family. Her method for getting free from her toxic debt was to follow my Rapid Debt-Repayment Plan® (RDRP). I was more than excited to hear her story.

She confirmed what I suspected: she paid back the debt in record time in a reasonable way that did not require her to sell the house or kill the grass. And she did it in less than three years.

Over a period of nearly 20 years I’ve had the wonderful privilege to lead thousands of people out of debt using the RDRP. Each time I get to speak with one of them it’s so exciting, it is almost like experiencing that joy for the first time.

Many people, myself included, say getting out of toxic debt is like being released from prison. The sense of accomplishment is indescribable, but even that does not compare to the sense of financial relief that comes with the accomplishment.

RDRP Overview

In a nutshell, here’s how the Rapid Debt-Repayment Plan works: you pay off your debt with the shortest term (usually that is your smallest debt) first and then use the extra money to prepay other loans. The RDRP’s simple concept is what makes it so exciting. This method is likely the most pain free of any that I know of because it is based on your current minimum monthly payments. If you can keep up with your current minimum monthly payments, you can get out of debt and in record time.

The key to turning the concept into action is to follow five simple RDRP Rules (yes, more rules!) and to create a chart that you can hang on your refrigerator that shows in black and white your detailed payment schedule right down to the final $0. I will show you an example of this in a few pages.

RDRP Basics

The RDRP creates a custom plan to pay off all your unsecured, toxic debt that uses your current minimum monthly payments. This is really important so let me say this again. Your plan to pay off your debts will use the same small monthly payments that you made this month on your credit card accounts. You will not need to add any additional funds to the amounts you are paying right now. This is the beauty of this plan: it takes the very least amount you are required to pay this month, uses that figure to establish your base, and then turns it into your get-out-of-debt card.

This is a key point and one that many people miss when they assume that there’s no way they can get out of debt because they cannot possibly pay more than the minimum payment.

You do not have a choice whether or not to pay your minimum monthly payments this month. And your RDRP is based on those minimum payments. Therefore, it is a plan you can and must put into effect immediately. It requires no new funding from you. It simply takes what you are already required to pay and turns it into a plan that will effectively get you out of debt, and in record time.

The Rapid Debt-Repayment Plan is designed for your unsecured debts. That does not mean the concept will not work for auto loans, home equity loans (HELs), and even mortgages. However, I want to caution you to not include your secured debts in your initial RDRP. The focus of the RDRP is ridding you of the most egregious of your debts, your toxic debts, which are your high-interest, unsecured consumer debts.

The Rapid Debt-Repayment Plan consists of five simple rules.

Rule 1. No new debt. This means you must immediately stop adding any new purchases to your credit cards. Period. No exceptions. You cannot put out a raging fire if you continue to pour gasoline on it. You cannot stop your bathtub from overflowing unless you turn off the tap. You cannot get out of debt unless you stop adding to it.

If you do not stop incurring new debt, no plan will ever work for you. The women I interviewed for the story had one thing in common: they stopped adding to their debt mess!

If you do not stop incurring new debt, you will go to your grave in perma-debt, which is a depressing thought but something you need to consider.

Rule 2. Add up your current minimum payments. Make a list of the payments you must make this month on your credit cards, store charge cards, installment loans, and personal loans. Include medical and dental payments—every unsecured debt for which you are currently responsible. This total amount is the amount you will pay toward your RDRP every month until you are debt free. Look at it. It is your new RDRP payment and it will not change from month to month. It’s a new fixed monthly expense that will take the place of all of the smaller payments you scramble to pay to your credit card issuers each month.

Rule 3. Line up your debts from smallest to largest. Put your smallest debt on the top and then in order with the largest at the bottom. Do not arrange them according to the interest rate. The reason why you want the smallest debt at the top is that it will be paid off most quickly. You will need that emotional boost to keep you going. You won’t believe how fantastic it feels to pay that first debt in full.

Rule 4. Pay the same amount every month. Do not pay attention to your creditors who will say you can pay less each month, which is what we call the “falling payment” method. For example, if your payment this month to your Visa account is $43, that will be your monthly payment to that debt until it is paid in full even though Visa will accept less as your balance declines. If the total of your debt payments this month is say, $300, this Rule 4 requires that you pay that same amount every month until you are debt free. The RDRP will show you how to divvy up that $300 each month until you are free from the debt prison.

Rule 5. As one debt is paid, add its payment to the regular payment of the next debt in line. This is where the “rapid” kicks in because you are pre-paying your debts with payments far greater than required. But still your total monthly debt payment remains the same. This is the key to getting out of debt fast.

Emotional Payoff

If you are struggling with the idea of concentrating on the shortest debt first (not necessarily the one with the highest interest rate), understand that there’s a good reason: you are going to need a big emotional payoff as quickly as possible. Reaching that first $0 is going to give you an emotional payoff like you never dreamed possible. You need a plan that works and one you will stick with. This is it. Believe me.

An Easier Way

Developing your RDRP by hand using a calculator is not impossible, but it is tedious. This is why we created the RDRP Calculator®, which is a member benefit of DebtProofLiving.com. You simply input your current balances, interest rates, and current payments. One click produces your custom RDRP showing the exact month you will be debt free. It also shows you how much you will save in the future if you begin saving your total payments once you are debt free. It is truly remarkable and will inspire you to get into a RDRP frame of mind . . . now!

Take a look at the RDRP example below. You see that by following the five simple RDRP rules, the entire debt is repaid in just 18 months. This same debt load paid back according to the creditor’s plan would have taken more than 8 years, assuming you add no more new debt!

Don’t Cancel Accounts

It will be tempting for you to cancel all of your toxic credit card accounts once you reach $0 balances on all of them. Don’t give in to that temptation. As you know from Rule 6, your credit score is a financial tool that you will need to protect. Canceling multiple accounts all at once could cause considerable damage to your score. The reason, as you will recall, has to do with your “utilization rate.” By canceling accounts, you reduce your total amount of available credit.

Of course I think you should be rewarded, not punished, for paying off a credit card and closing the account! But I don’t write the rules, at least not those rules.

Reasonable Way to Close Accounts

If you have quite a few accounts that you would like to close, there is a way that you can do this that won’t cause undue damage to your credit rating. Just make sure that the account has a $0 balance before you attempt to close it.

You do not want to close multiple credit card accounts at the same time. In fact, one or two a year is the rate at which you should do this. This is a slow enough rate that your credit score should escape any undue damage. You might see a few points come off, but the score should be restored after a short period of time.

But first, the facts. Banks, credit card companies, and retail credit granters are very keen on retaining their revolving or “open end” credit accounts (from the Latin root meaning there’s no end to the amount of money we intend to squeeze from you during your lifetime. Or, we love you and we have a wonderful plan for your money.)

These companies paid dearly to bait, snag, and then reel you in. Since that time you’ve rewarded them handsomely. When they learn you’re breaking up with them, they are not going to be happy. Reminder: it is not advisable to close an account until you have achieved $0 balance. To do otherwise invites an interest rate increase to the maximum allowed by law, and, by the way, in some states there is no such law.

Make the call. Find the toll-free number for customer service (on the back of the credit card itself, on the last statement, or on the company’s website). Tell the customer service representative that you are requesting that they close your account. You’ll get an argument, of course, but stick to your guns. You want to say, “Please close my account and report it as closed to the credit bureaus.” Record the full name of this person and the date you made this request.

Send the letter. Immediately follow up with a letter that says the same thing. If you still have it, enclose the card, which you’ve cut into pieces. Send this letter by US Certified Mail with a request for a delivery and signature confirmation. This will cost you around $5, in addition to the regular postage, which as you know increases about every five minutes or so.

Follow up. About two weeks after that letter is delivered, call customer service again to confirm that your account has been closed. Assume it won’t be closed (they’re fighting you here, remember?). Repeat your verbal instructions. Close this account!

Verify. In about three months order a copy of your credit report. If the account shows “closed by request of customer” or some reasonable facsimile, you’ve achieved success. If not, go back to step one, make the call, and go through all the steps again.

Repeat as necessary. You could get full cooperation on your first call. Or it could take several rounds to permanently part company with this account.

Lesson to be learned. It’s a lot easier to open than to close a credit card account. Even if you have all the current information like your account number, their customer service phone number, and address, it could cost you both in time, trouble, and postage. If not, your work will only multiply. Think about that the next time you’re tempted to complete a new application.