Editor’s Note: The following is the first installment of a two-part essay.
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.
- 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.)
- 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.
- 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.
For Part 2 of this two-part article, go here.