Helping A Friend Get Out of Debt – Part 1 – Collect Your Debts

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This article was chosen as an editor’s pick in the 96th Carnival of Money Stories hosted by our friends at Squirrelers.

Several weeks ago, one of my friends (we’ll call him Debtor Dan for privacy reasons) asked me if I could help him look at his consumer debts and current finances to see if I could identify any areas for improvement and/or to help him pay down his debt faster.

After explaining my normal “protect-myself-in-this-sue-happy-society” disclaimer about not being a certified financial professional, I said, “Sure! What a great learning experience for me since I haven’t ever (luckily) had consumer debt debt to pay off.”

What will follow is a three part series detailing the steps I’ve recommended that my friend take in order to get him on the fast lane to being debt free! It is my own personal adaptation of the great advice contained in two of my favorite (and most straight-forward) personal finance books for debt management plans, I Will Teach You To Be Rich by Ramit Sethi and Debt Free for Life by David Bach.

Enjoy, and be sure to share you experiences by getting involved in the comments.

Facing the Truth Can Be Scary

Prior to beginning this endeavor, I had read in many personal finance books about how nerve-racking and embarrassing debt can be for individuals. However, it never really hit home for me until hearing about it first hand from Dan.

My friend would tell me in length about how ashamed he was of his debt because he accumulated it during his undergraduate university days and had since changed his ways. Debtor Dan also proceeded to tell me that I was the only non-credit-company human being who knew the concrete numbers/magnitude of his debt. However, I was very glad that he accepted my help and was open to sharing the details because ignoring the problem will only make it worse.

Where Should You Begin?

When Debtor Dan and I first sat down to discuss our plan of attack, he naturally had a lot of questions.

One thing that he was wondering about was if there were any “higher-tech” financial remedies other than just the old-fashioned gradual debt repayment approach. In particular, he asked about debt consolidation loans and debt counseling.

From what I’ve read, I personally do not think that debt consolidation loans and debt counseling is worth the time and effort unless your financial situation is such that a) you are on the verge of bankruptcy or b) making your minimum payments results in you not being able to feed yourself or your family.

In Debtor Dan’s case, he really was living quite comfortably, but just wasn’t seeing any results in paying down his credit card debts each month with the minimum payment.

So, there would be no shortcuts or fancy remedies here. Only hard work and time would be needed to get Debtor Dan out of debt! With that settled, it was time to get started.

Collecting Your Debts

The first part in creating what I like to call a Debt Free Action Plan, Collecting Your Debts, is also the hardest part. It is where one will have to come face-to-face with the shear volume of debt that they have accumulated.

To help you complete this step, I’ve put together a handy spreadsheet that you can download at the following link – Google Docs Spreadsheet – Collect Your Debts. The table is also shown below.

On the spreadsheet, simply fill in the following information:

  • List out the name of all of the debts you have with an identifier in the first column.
    • This includes car loans, home loans, credit cards balances, pet care loans, furniture loans, computer loans, student loans, etc. If you owe money to someone, put it here!
  • In the 2nd and 3rd columns, fill out the total amount outstanding that you have to pay back and the annual interest rate (APR), respectively.
  • In the next 3 columns, list the minimum monthly required payment, the due date for that payment, and the monthly amount that you are currently paying on the loan.
  • Leave the last (green) column blank, for now.
  • Lastly, the most important step in this is to then use the Excel Sorting function to sort the rows based on which debt account has the highest APR. The highest APR should go on top, while the lowest should be placed in the last row of the spreadsheet.

So there! You did it! That was the hard part. You tallied up all of your debts and are now ready to get those balances slashed to zero.

In Part 2 of this series, we’ll take a look at the things Debtor Dan and I did to calculate the target monthly payments going forward (in the last green column). After doing this next step, your Debt Free Action Plan will be complete.

How about you all? Do you currently keep track of the total amount of debt Share your experiences by commenting below!

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    1. i would like to help a friend of mine get out of debt. i have successfully gotten myself paid down to 8,000 from 30,000 in 4 yrs. i did it mostly by settling and even won in court once. i never had any outside representation. long story short, how or what does he have to do for me to legally be a go between for him and his creditors?

      • @ Erica – This is a very good question. The truth is – I'm not sure officially. However, I would assume that you would want to ask a fee-based financial planner about the best way to proceed. This is usually someone with a Certified Financial Planner certificate.
        My recent post Easy Like Sunday Morning Weekly Recap and Roundup – # 5 – December 17th, 2011

    2. Kay Johnson says:

      This really helpful, I think the chart and using that way to sort your debts is a really good idea. Simple yet effective!

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