I heard Dave Ramsey on television this morning talking about his “snowball” approach to becoming debt-free. Essentially, he advises everyone to array their debts from smallest to largest, then attack the smallest one first until it’s paid in full. Then the next smallest and so forth. Anyway, he was asked about which debt a consumer should attack first: a $52,000 HELOC or a $55,000 student loan. Ramsey said that because the HELOC debt was smaller and because the student loan debt is forgiven if you die or become disabled, they should try to pay off the HELOC first.
Buzz! Bad advice alert.
Ramsey fails to mention that the student loan debt is almost never forgive, surviving even bankruptcy (unless you engage a firm like ours to negotiate a significant reduction in it). Second, imagine if the consumer takes the advice, pays the HELOC and then something really bad happens that necessitates a bankruptcy. The consumer will still end up owing $55,000 in student loans even post-bankruptcy. Bad result.
On the other hand, if the consumer paid the student loan first and then was forced to go bankrupt, the HELOC would be fully dischargeable in bankruptcy. The cost of taking D. Ramsey’s advice in this scenario: $55,000 plus interest.
Don’t believe everything you read or hear. If you have HELOC or student loan debt and are struggling, seek out the advice of a true legal professional. Most reputable lawyers offer free consultations (we certainly do) that will present information and options for you to consider.
Sometimes your situation is just too hot to make use of a snowball.
Kevin Fallon McCarthy
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