2/28/2005
Advice from Nashville's leading Financial Aid Advisor Dave Ramsey
Dave Says
By Dave Ramsey
Author of:
Financial Peace and
The Total Money Makeover
"My debt is half my income, am I bankrupt?"
Dear Dave,
I got divorced a few years ago. At the time, we were living “high on the hog.”
So, I walked away from the divorce with $49,000 in debt, not including the
house. We sold that for just about what we owed on it.
After the divorce, I got serious about getting out of debt. I got a second job
and cut up my credit cards. At this point, I’ve managed to pay down my debt to
about $14,000. However, my situation has changed. My income has dropped quite a
bit due to a lag in the business sector in which I work. So, I’m only bringing
home about $39,000 a year. My rent is about $700 a month.
In addition, I have custody of my 15 and 17 year old sons – and boys can be
pretty expensive. My ex-wife is not in a position to help out with financial
support for them. I also have a daughter who still lives with my ex-wife and I
do feel a financial obligation to help support her as well. I have no other
debts except this outstanding balance on those old high interest credit cards
that I got rid of.
I think my problem is that I’m retirement-poor. I’ve got a great retirement plan
at work and, up until my divorce, I hadn’t been saving for retirement. Now I’m
putting about $700 a month into it.
All that being stated, am I in a position to declare bankruptcy on this last
$14,000?
Erik in Grand Rapids, MI
Dear Erik,
I’m a little bit confused. You take home about $3,000 a month in pay. You’ve
only got a $700 rent, two kids living with you and child support payment on your
third child; and you can’t make payments on this $14,000 debt? You’re nowhere
near bankrupt.
If you said you were broke and out of a job, I’d still tell you it was stupid to
go and file bankruptcy on $14,000 because you could get a part-time job
delivering pizza and pay that off quickly.
You need to stop investing in your retirement plan for one year, until you can
become debt-free. In a sense, what you’re asking is, “Should I file bankruptcy
so I can continue funding my retirement?” Absolutely not!
I think you’ve been trying to do two or three things at once financially, and
that’s not working. You’ve got to be focused about this. You need a written
budget every month, stop contributing to your retirement plan temporarily –
that’s a key word here – attack this debt and get it paid off in the next year.
You can do this!
-Dave
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