Dave Ramsey is a well-known financial expert who has inspired many to become "Everyday Millionaires" by getting out of debt, living within their means, and saving wisely. However, what does he think about bankruptcy? In short, he believes it should be the last resort, comparing it to filing for divorce. Just like divorce, bankruptcy should only happen after you have tried everything else to fix your financial situation.
Dave Ramsey is passionate about personal finance, and his "Baby Steps" have helped many people. But what if you are struggling with massive debt that even the "Debt Snowball" method can't fix? What would he say about bankruptcy? Fortunately, we don't have to guess.
Dave Ramsey’s Background
Although Dave Ramsey is now a self-made millionaire who helps people worldwide achieve financial stability and abundance, he hasn't always 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 at the time. 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. He learned a lot about how to be financially free from the worries of the world through his bankruptcy experience. 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 dive into Ramsey's perspective on bankruptcy, let's first define what it is. 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 bankruptcies: Chapter 7 and Chapter 13.
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 need to 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, there are exemptions 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, 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 a period of 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 who are 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.
How Much Does It Cost To Avoid Bankruptcy? What Are My Options?
Back in 2019, we discovered that there were very few impartial resources 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, as well as alternatives. This calculator has already helped thousands of people, and as a result, we've received a 5.0 rating on Google based on over 100 reviews.
With our calculator, you can easily estimate the all-in 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 get a clear understanding of your options and make an informed decision about how to proceed.
If you're interested in trying out the calculator, you can access it below. You don't even need to provide an email address unless you want additional insights.
Other Forms of Bankruptcy
Have you heard of Chapter 13 bankruptcy? It's another common form of bankruptcy that's also known as the wage earner's bankruptcy. This is because, unlike Chapter 7 where your debts are completely wiped out, with Chapter 13, you're still required to make monthly payments on your debt.
Here's how it works: you'll work with your creditors and a bankruptcy trustee to determine a monthly payment amount that 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 after that time is eligible to be discharged.
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.
Now that you have a better understanding of Chapter 13 bankruptcy, let's see what financial expert Dave Ramsey has to say about the process.
Would Dave Ramsey Recommend Filing For Bankruptcy?
If you're looking for advice on how to improve 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. Why? 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 that many people jump into bankruptcy too quickly, before they really 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 having to file 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 a series of actions that can lead you to your desired outcome. It's important to note that these steps may not be suitable for everyone. If your situation is dire, and you're on the brink of homelessness or struggling to provide for your family, filing for bankruptcy may be your best option. Therefore, it's crucial to assess your unique situation before taking any advice.
However, if you're not in an urgent situation that requires immediate bankruptcy filing, you may want to 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 important to prioritize your basic needs. These basic needs are often referred to as the "four walls," which include food, utilities, shelter, and transportation. According to Ramsey, it's crucial to take care of these four things before you start paying off any other debts. Without these essentials, it's nearly impossible to get out of debt. Transportation, for example, is necessary to access the other three basic needs. However, this doesn't mean you need to have the fanciest car. It could simply mean having a bus pass. Sacrificing certain luxuries may be difficult, but it's necessary to avoid bankruptcy.
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 an even more extreme situation.
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 filing for bankruptcy, it's likely that 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 generic products that are cheap and 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 keep in mind that this extra income shouldn't be used for personal expenses. Instead, it should go directly towards paying off your debts.
Of course, taking on a second job means sacrificing some of your free time, which can be tough. 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 tough 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 end up being more than the debt you originally owed. 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, though, to thoroughly research any company you're considering working with.
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.
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.