Last week, in Part One of this article, I talked about how to prioritize your spending when you don’t have enough money to pay all of the bills. If you got nothing else out that, I hope you remembered to be sure to take care of your necessities first: Food, Shelter, Transportation, and Clothing. Of course, you’ll take a hard look at your expenses and income to see what actions you can take longer term to balance your budget.
In the meantime, what about your creditors? After taking care of your necessities, you have some money to pay on your credit cards, student loans, and medical bills, but not enough to cover the minimum payments required. The Pro Rata Plan is your answer!
I first learned of the Pro Rata Plan almost ten years ago when I began teaching Dave Ramsey’s Financial Peace University at my church. The concept is very simple – take whatever money you have to pay your creditors and divide it proportionally based on your monthly payments (or your total payoff to each). Let’s look at an example. Below are your four debts that you need to pay and the regular monthly payments. Your minimum due is $700 per month.
- Student Loan – $300
- Visa – $200
- Home Depot – $150
- Medical Bill – $50
So, what should you do if you only have $350 to pay on these bills? According to the Pro Rata plan, you should divide it proportionally among the debts. Since you only have half of what the minimum payments are, you should send each creditor 50%, as detailed below:
- Student Loan – $150
- Visa – $100
- Home Depot – $75
- Medical Bill – $25
Some of you might be tempted to pay a full payment on some of the debts and leave others unpaid, such as paying the Visa and Home Depot, and not paying anything on the student loan and medical bill. I do NOT recommend doing this! You should send something to each creditor every month even if it’s just $5. When you send them this payment, also send a letter explaining that this is all you can afford to send right now and you are working on a solution to fix your cash flow situation.
Will Visa and Home Depot be happy that you’re sending them only half of the minimum due? Probably not. Will they be calling you to tell you they’re not happy? Probably. However… They will get MUCH crankier if you send them NOTHING. When you miss multiple payments and dodge collector calls, you increase the likelihood of paycheck garnishments and bank account attachments. Trust me, you don’t want that! If you are paying your creditors something every month – even if it’s less than the minimum due – they are less likely to take legal action against you.
Check out this great PDF form which contains the Pro Rata calculations (based on payoffs instead of monthly payments – both methods are acceptable) and a sample letter to send to your creditors. Refer to Part One of this article for tips on how to balance your budget, so you only need the Pro Rata plan for a short period of time. Please be sure to share this article with your friends or family. Even if you don’t need this information, it could a God send for someone else struggling with these issues.