Below is a reply
I wrote to a question received in Email.
This response offers a simple example of the “Pro Rata Plan” that Dave
Ramsey suggests for folks whose income is too low to allow them to make even
minimum payments on their debt. If you
find yourself (or a loved one) in that situation, I hope this simple
illustration is helpful. -- kgc
>
What do I do if I can't meet all my creditors minimums?
This is
clearly a tough situation, but there are things you can do. Dave calls
this the "Pro Rata plan," because basically you pay everyone a
pro-rated amount, based on the amount you owe them, and the amount you have
(total) to pay on all the bills.
I think
it's easiest to explain with a simple example. Let's say we
have a total of $500 per month that we can safely allocate to all the bills
(IOW after your basic necessities -- housing, food, utilities, transportation
-- are taken care of), and 5 creditors to pay:
Total $$$
(after necessities) to apply to bills: $500.00
Creditor
Balance Min. Pmt.
----------------
------- ---------
Credit
Card 3,200 85.00
Consumer
Loan 7,500 320.00
Doctor
#1 2,000
100.00
Doctor
#2 5,000
200.00
Hospital
1,500 75.00
------- ---------
Totals: 19,000
780.00
So in
this example we're $280 (780 - 500) short.
The next
step is divide the balance of each by the total amount you owe to all, which
gives you the percentage of the total each creditor represents, e.g. 85 / 19000
= 16% (I've rounded the percentages):
Creditor
Balance Min. Pmt. %
----------------
------- --------- ------
Credit
Card 3,200
85.00 16%
Consumer
Loan
7,500 320.00 39%
Doctor
#1 2,000
100.00 10%
Doctor
#2 5,000
200.00 26%
Hospital
1,500 75.00 0%
------- --------- -----
Totals: 19,000
780.00 100%
Now we
take the amount we have to pay ($500.00) and multiply that times the percentage
for each bill:
Creditor
Balance Min. Pmt. % New Pmt.
----------------
------- --------- ------ --------
Credit
Card 3,200
85.00 16% 80.00
Consumer
Loan
7,500 320.00
39% 195.00
Doctor
#1 2,000
100.00 10% 50.00
Doctor
#2 5,000
200.00 26% 130.00
Hospital
1,500 75.00
0% 45.00
------- --------- ------ --------
Totals: 19,000
780.00 100% 500.00
Now we
have fair amounts we send to each creditor. Keep in touch with them on
what you're doing and why you're doing it. Send a letter explaining that
you are paying less than the minimum temporarily, and include a copy of these
figures with each check you send.
Some
might call and complain, call you and your mother ugly names, etc. Let
'em! Stick to your plan, because if you accede to their plan (which is
always "send us more money") you'll wind up in the same jam all over
again. Making regular payments and staying in communication with
creditors goes a long way towards keeping you out of court. Of the folks
I know of that have used this plan, none were sued (after starting the plan,
anyway!)
It
doesn't solve the root problem (too little income, too much debt!), but it will
help you pay everyone you owe something, even if a small amount, it will help
you avoid making promises to creditors that take too much from
necessities, and just as importantly, it just feels better to have a plan and to have some
control over the situation, even though it's such a tough one.
Some
creditors may tack on extra charges at this point; there's probably not much
you can do about this, though it's always a good idea to call to explain your
situation and ask them to remove the extra fees. Whether they do or not,
don't let them control your plan -- and they will try!
>
I am looking for ways to make more money and ways to
> reduce our monthly expenses.
Great,
keep at it until your situation improves! Obviously this pro-rata plan
should be used on a short-term basis only. It's extremely important to
get your expenses down and/or your income up to get back to where you can get
current with your creditors.
Good
luck, my friend. I hope this helps.
kgc
_____________________________
Keith
Chuvala
Friendswood,
Texas USA
http://www.chuvala.com
_____________________________