4/04/2005
Advice from Nashville's leading Financial Aid Advisor Dave Ramsey
Dave Says
By Dave Ramsey
Author of:
Financial Peace and
The Total Money Makeover
"Is bankruptcy the answer?"
Dear Dave,
My husband and I have been trying to get our budget in order, but my husband has
been debating if we should just file bankruptcy. I know you don’t recommend
that, but we have about $70,000 in debt with a take-home pay of about $2,200. We
haven’t been able to find any way to get any more money and we can’t make all of
these payments. The $70,000 in debt includes his student loan of about $25,000
and my student loan of about $15,000. In addition, we have about $12,000 we owe
on a car and the rest of the debt is credit cards and medical bills.
We both work, but half of his income goes to child support for two kids from a
previous marriage.
Kimberly in Nashville, TN
Dear Kimberly,
I know this is a really scary situation for you. I’ve been there myself and I
know how it feels. Understand, however, that bankruptcy is not going to help you
much; no matter if I recommend it or not. Student loans are not eligible for
bankruptcy in 99% of the cases. So $40,000 of your debt most likely can’t even
be included. In addition, you’ll have to re-sign the car loan and keep making
payments on it if you want to keep your car. That’s $52,000 of your $70,000 in
debt that won’t even be part of the bankruptcy. So, filing bankruptcy really
isn’t going to bring you much relief from this mess, and that’s not even
considering the trouble and pain of declaring bankruptcy.
You do have a car payment you can’t afford. You need to sell the car and buy a
really inexpensive $1,000 or $2,000 car for cash, if you’re going to make it
through this. I’d also recommend you call the student loan companies and ask for
hardship deferrals.
In addition, you need to get on a really tight written budget right away. Begin
paying off those medical debts and credit cards, smallest balance to largest.
Get those paid off and then attack the $15,000 student loan. After that, attack
the $25,000 loan. Sadly, this also means that you’ll both be working some extra
jobs for at least a few years to help make dents in these debts. If you can earn
an extra $1,000 a month you can put on these debts, it’ll shorten the time in
debt dramatically.
You both also need to review your income situations because $2,200 a month is
tough to live on – even if you have no debt. You also need to check how much
he’s paying in child support. If he’s actually paying half of his income for
that, it’s too much. The law in Tennessee says that about 1/3 is the maximum for
child support. I’m not trying to cheat kids out of child support. I do think you
need to pay that money, and they need it, but you also need to make sure the
amount you’re paying is fair and legal.
I’m not going to fool you, this won’t be fun or easy and it’s going to take some
time, but you can work your way out of this. Even if bankruptcy were a good idea
for some people, it’s not going to be much good to you at all.
-Dave
More About Dave
Dave Says Articles
Dave Ramsey History
Dave Ramsey.com
