Dave Ramsey’s Background
Although Dave Ramsey is now a self-made millionaire who helps people worldwide achieve financial stability and abundance, he has only sometimes been so successful financially. In 1988, he had to file for bankruptcy due to his financial risks, mainly real estate loans, which he couldn't cover with liquid cash despite being worth over a million dollars. Filing for bankruptcy forced Ramsey and his wife to start over, but it also allowed him to realize how reckless he had been with money.
Despite the initial setback, Ramsey turned his financial life around and began making logical money decisions. Through his bankruptcy experience, he learned a lot about being financially free from the world's worries. As a result, he embarked on a journey to help others achieve the same. Although his tone can be rough and his advice harsh, many seek his financial wisdom when attempting to regain control of their finances.
So, would Dave Ramsey ever recommend filing for bankruptcy? Let's find out.
What is Bankruptcy?
Before we discuss Ramsey's perspective on bankruptcy, let's define it. Bankruptcy is a legal process that allows individuals to eliminate or repay their debts under the protection of the court. There are two main types of bankruptcy: Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is often referred to as liquidation bankruptcy. This is because when you file for Chapter 7, your assets are sold to pay off your debts. Once the assets that can be liquidated are sold, the remaining debt is discharged or forgiven. However, keep in mind that not everyone can file for Chapter 7. You must pass the means test, which looks at your income compared to the state's median income. Depending on where you fall, you may or may not be eligible for Chapter 7. Another important consideration is that you may have to sell your home and car. But don't worry; exemptions are available to help protect some of your assets. Consult with a bankruptcy attorney in your area to learn more about what can be exempted if you file for Chapter 7.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy, on the other hand, is a reorganization bankruptcy. This means that instead of liquidating your assets, you create a repayment plan to pay off your debts over three to five years. This plan is based on your income and expenses. Once you complete the repayment plan, the remaining debt is discharged.
It's important to note that bankruptcy is not a quick fix for debt problems. It can have long-lasting effects on your credit score and financial future. However, it can also provide relief and a fresh start for those struggling with overwhelming debt. If you're considering bankruptcy, it's crucial to consult with a reputable bankruptcy attorney and weigh the pros and cons carefully.
What Are My Other Options?
Back in 2019, we discovered that very few impartial resources were available to help people understand their options for getting out of debt quickly, easily, and affordably while also avoiding wage garnishment. To address this issue, we created a debt cost and options calculator that offers personalized estimates for various options, including their pros and cons and alternatives. This calculator has already helped thousands of people, so we've received a 5.0 rating on Google based on over 100 reviews.
With our calculator, you can easily estimate the monthly costs of different options, such as debt payoff planning, debt management (non-profit credit counseling), debt negotiation, and bankruptcy. It's a great way to understand your options and make an informed decision about how to proceed. You have many options, such as bankruptcy, debt settlement, debt management, or loans, so be sure to exhaust all options before making a final decision.
You can access the calculator below to try it out. You don't need to provide an email address unless you want additional insights.
Other Forms of Bankruptcy
Chapter 13 is another common form of bankruptcy, also known as the wage earner's bankruptcy. Unlike Chapter 7, which completely wipes out debts, Chapter 13 requires monthly payments.
Here's how it works: you'll work with your creditors and a bankruptcy trustee to determine a monthly payment amount you'll pay to the court. This money will then be distributed amongst your creditors. Typically, Chapter 13 cases last between 3-5 years, and any remaining debt is eligible to be discharged after that time.
It's important to note that not all debt can be discharged. Federal student loans, owed taxes, child support payments, and alimony payments are some examples of debt that require full repayment and cannot be discharged.
Two main factors determine the payment plan: non-exempt equity and disposable income. These factors can determine how expensive your Chapter 13 is. For example, this could be home equity above exemption or income left over after expenses.
Now that you have a better understanding of Chapter 13 bankruptcy let's see what Dave Ramsey has to say about the process.
Would Dave Ramsey Recommend Filing For Bankruptcy?
If you're looking for advice on improving your financial situation, Dave Ramsey's website has plenty of articles that can help. From investing in real estate to creating a budget-friendly meal plan, there's no shortage of tips for achieving financial freedom. But what about bankruptcy?
In short, Ramsey sees bankruptcy as a last resort. He recommends selling everything you own before filing for bankruptcy. According to Ramsey, filing for bankruptcy is one of the biggest financial mistakes you can make. He's even gone so far as to call it a devastating and life-altering event that he would never recommend. While it can be a helpful tool for getting out of debt, the emotional, physical, mental, and financial effects can last a lifetime. Ramsey believes many people jump into bankruptcy too quickly before they need to. That's why he advises doing everything you can to avoid it.
As someone who has filed for bankruptcy himself, Ramsey knows firsthand how far-reaching the consequences can be. He often talks about the feeling of hopelessness he experienced during that time in his life and how difficult it was to recover emotionally. So, what should you do instead? Ramsey's website lists six things you can do to avoid filing for bankruptcy.
Ramsey’s 6 Steps To Avoid Bankruptcy
Let me start by saying that these six steps are not alternatives to filing for bankruptcy. Rather, they are actions that can lead you to your desired outcome. It's important to note that these steps may not suit everyone. If your situation is dire, filing for bankruptcy may be your best option. Therefore, assessing your unique situation before taking any advice is crucial.
However, if you're not in an urgent situation requiring immediate bankruptcy filing, consider taking these six steps to avoid it. Check out this resource for more information.
1. Take Care of the Four Walls First
What Ramsey is saying here is that it's essential to prioritize your basic needs. These basic needs are often called the "four walls," which include food, utilities, shelter, and transportation. According to Ramsey, taking care of these four things is crucial before you start paying off any other debts. These essentials are necessary to get out of debt. Transportation, for example, is required to access the other three basic needs. However, you can still have the fanciest car. It could mean having a bus pass. Sacrificing certain luxuries may be difficult, but avoiding bankruptcy is necessary.
2. Sell Everything In Sight
When faced with bankruptcy, Dave Ramsey and his wife took extreme measures to get back on their feet. They sold everything they owned that had any monetary value. While this may seem drastic, Ramsey argues that bankruptcy is even more extreme.
If you're struggling with debt, take a cue from Ramsey and start selling any items you no longer need or use. Old DVDs, furniture, books, school supplies, boats, and other items can all be sold for extra cash. This can help you keep a roof over your head or make a dent in your debt.
3. Live on a Bare Bones Budget
If you're considering bankruptcy, your budget can no longer accommodate any excess or luxury. This means cutting back on more than you might expect. You'll need to cancel cable, streaming services, and possibly even your cell phone plan. Eating out, especially at sit-down restaurants, is out of the question.
You'll also have to adjust your daily lifestyle. Do you usually get your hair done every few weeks? That's a luxury you can't afford anymore. Do you get your car detailed every time it gets muddy? Sorry, that's a no-go too. You'll need to buy cheap generic products that can keep you full and energized. Dave Ramsey calls this the “beans and rice, rice and beans” diet. It may seem extreme, but so is filing for bankruptcy.
4. Get a Second Job
Did you know that having an additional source of income can significantly reduce your chances of filing for bankruptcy? If you have a few hours to spare in the afternoon or evening, why not use that time to work a second job, like delivering pizzas or working in an office? However, it's important to remember that this extra income shouldn't be used for personal expenses. Instead, it should go directly toward paying off your debts.
Of course, taking on a second job means sacrificing some of your free time, which can be challenging. But it's important to remember that this is only temporary, and it's for a good cause. By putting in the extra effort now, you can get your family out of debt sooner and enjoy more financial freedom in the long run.
5. Don’t Fall For Debt Settlement or Consolidation Tricks
When you're in a challenging financial situation, it's easy to fall prey to debt-relief scams. Some companies promise to decrease your total debt amount, but the fees they charge can be more than the debt you owe initially. Instead of relying on these gimmicks, it's best to trust the process and work hard to pay off your debts.
However, it's worth noting that not all debt relief companies are scams. While financial guru Dave Ramsey advises against using credit cards, loans, or debt settlement/consolidation companies, we don't necessarily agree with this blanket statement. Just like credit cards can be helpful if used responsibly, some debt relief companies can offer solutions for overwhelming debt. It's crucial to research any company you're considering working with thoroughly.
6. Talk to a Financial Coach
One of Ramsey's final recommendations is to seek guidance from a financial coach. Discussing finances can be difficult, particularly during a crisis. However, knowledgeable coaches can assist you in comprehending your financial status and setting you up for future success.
Conclusion
Although Dave Ramsey himself filed for bankruptcy in the past, he advises that it should be your last resort when trying to get out of debt. He suggests six steps that you can take to avoid bankruptcy, but they require dedication.
We take a different approach to overcoming debt because we think it is not a "one size fits all;" it depends on your situation. A debt payoff plan using the snowball method may work for one person, but it may not work for another, so be sure to explore all your options before making a decision.
