November 20, 2017

Dave Ramsey hates bankruptcy – but don’t listen to him

If you’ve found yourself in need of financial help, and have searched the internet for information on financial matters, you have undoubtedly come across Dave Ramsey’s website and his financial management products designed to help people get out of debt and manage their finances.  I used to be a big fan of Mr. Ramsey, and most of the information you find on his website is useful.  However, his stubborn disdain for bankruptcy is illogical and borders on being deceptive.

I would like to point out, before I get started on why Dave Ramsey is wrong about bankruptcy, that I am in fact a bankruptcy attorney.  I meet with people on a daily basis that have run out of options for paying down their debt.  They are often in the process of being sued, or having the family home foreclosed, and they live under daily harassment from creditors.  These people need relief now!  On the other hand, I also run into people who only have $10,000 of debt, and simply need to manage their finances appropriately to pay down their debts.  For those people, bankruptcy may not be the right option.  I do not try to sell bankruptcy to people if they don’t need it.  I merely use the appropriate tool when necessary, and there are some situations where bankruptcy is the right tool.

Here is why I think you should disregard Dave Ramsey’s advice on bankruptcy.

1.  Dave Ramsey has a specific counseling service that is targeted at people considering bankruptcy. It strikes me as disingenuous to take the position that bankruptcy is never a good option when you are selling a service that competes with bankruptcy.  It’s hard not to draw the conclusion that he is trying to push his product.

2.  He claims that “bankruptcy is a gut-wrenching, life-changing event that causes lifelong damage.” It is true that the process of filing bankruptcy can be “gut wrenching,” but when compared to the reality of shouldering a large amount of debt for years to come, it is not as gut wrenching as being sued, and having the phone ring for months day in and day out from creditors calling to collect unpaid debts. I’ve seen many people struggle to make interest payments on an enormous amount of debt for years, only to reach retirement age and realize they are out of time and penniless, and they are then forced to file bankruptcy anyway.  That’s gut wrenching!  If they had just admitted to themselves earlier that they needed a fresh start, they could have been saving for retirement instead of paying interest on a debt that they really had no hope of repaying.

3. Dave Ramsey uses his own personal experience of bankruptcy to support his claims of detrimental emotional effects caused by bankruptcy.  However, Dave Ramsey’s bankruptcy experience is very out of the ordinary.

  1. Dave Ramsey was an overleveraged real estate speculator that couldn’t liquidate his assets fast enough when the bank called his loans, leaving him with millions of dollars of debt.  Most people who face the possibility of filing for bankruptcy are not overleveraged real estate speculators, but rather are normal families with both parents working to keep food on the table and pay the bills.  They might have experienced an income reduction due to the loss of a job, the loss of a spouse’s ability to work, or another life changing event such as divorce. (See The Two Income Trap, by Elizabeth Warren.)
  2. Dave Ramsey waited years before filing for bankruptcy.  He allowed himself to be sued, harassed, and frustrated.  If Dave Ramsey had realized the state of his financial situation sooner, and realized that bankruptcy is not a defeat, but a tool created to help people, he could have avoid the anguish he endured.
  3. If Dave Ramsey had not filed for bankruptcy, it is very unlikely that he would have enjoyed the success that he has today.  It was because he filed bankruptcy that he was able to move past his debt and begin his new life debt free.

4. One reason Dave Ramsey has become so successful is that he has explored the spiritual component of debt that people experience. This experience is often times very dark and humbling and can cause emotional distress. And it is precisely because the experience of being a debtor is so dark and serious that I believe that bankruptcy relief is essential for many people. Dave Ramsey encourages people in a spiritual way and helps them get through their dark hours, and they need that. However, it strikes me as abusive to prey on people’s religious beliefs and feelings of guilt to guide them away from a fresh start in bankruptcy. “Pay your debts” is generally good advice, but not for those at rock bottom who have no ability to repay. If it becomes clear that they can’t pay their debts, you have to give them a way out that is achievable, reasonable, prompt, and realistic. They need relief. They have already been struggling for so long. When I meet with potential clients about bankruptcy, the topic of suicidal thoughts comes up surprisingly often. Getting them relief and a fresh start can literally be a life or death issue.  Divorce also comes up a lot.  Getting a debtor relief can also save his or her marriage.  This is serious stuff, with deep spiritual implications.

5. Using Christianity to lead people away from bankruptcy is ironic, because forgiving debts every 7 years comes straight from the Bible. Deuteronomy 15:1 says “at the end of every seven years, you must cancel debts.” This passage was the basis for the practice of debtor’s relief in the ecclesiastical courts of old, which evolved into courts of equity, which were a forebear of modern U.S. Bankruptcy Courts. In my bankruptcy law practice, it has been striking to me how many of the judges, trustees, and attorneys in the bankruptcy legal field are deeply spiritual people.  (Note: Our bankruptcy law says that if you get a bankruptcy discharge, you can’t file bankruptcy again for 8 years.  Until the bankruptcy law changed in 2005, the rule was that you couldn’t file bankruptcy again for 7 years.  If you trace the origin of that 7 year rule, it goes all the way back to Deuteronomy.)

6. It is immoral to borrow if you know you are not going to repay, and it’s also immoral to not repay your debts if you have the money to do so. But it’s not immoral to not pay if you can’t pay. If you borrowed in good faith, with an honest intent to repay, and your plans simply didn’t work out, and you just can’t repay your debts, there is nothing morally wrong with that. Acknowledging facts is moral. Coming to terms with the truth (such as “I am never going to be able to pay off this debt”) is a good thing to do.

7. Dave Ramsey also argues that bankruptcy will harm your credit. That’s hogwash for many reasons.

  • If you are a good candidate for bankruptcy, your credit is already ruined.
  • Also, filing bankruptcy helps your credit recover more quickly because it discharges your debt, thus giving you a better ability to repay any new, post-bankruptcy debt. Creditors like that. Many of my bankruptcy clients have been former realtors, mortgage brokers, and auto salesmen who have been in the business of trying to get people approved for loans.  They consistently tell me that it is much easier to get someone approved for a loan if they filed bankruptcy and waited 2-3 years than if they didn’t file bankruptcy and still have all that old debt and all those late pays on their credit report.
  • Also, you can only file bankruptcy every 8 years, so if you have recently filed bankruptcy, any new lender doesn’t have to worry about you running out and filing bankruptcy. This is  another reason why some lenders SEEK OUT people who have just filed bankruptcy.
  • Also, as Dave Ramsey states so clearly in his books, you are probably better off never borrowing again. So who cares what your credit score is?

8. It is true that the fact that you filed bankruptcy will be on your credit report for 10 years, but most lenders don’t give much weight to events older that 2 -3 years.  They know that many people hit bumps in the road and then get their financial lives bank on track.

I’m not the only person who thinks that Dave Ramsey has missed something important when it comes to bankruptcy. A quick search on the internet lead me to discover several other blogs that discuss the same arguments and opinions I have discussed above.

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