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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