A few weeks ago, I came across this article by Dave Ramsey. In case you don’t know, Mr. Ramsey is an author and radio personality who gives advice about financial matters. His programs may work for many people and he may have some good ideas about investing, but his “Truth About Bankruptcy” article was off-base.
– Let’s start with his opening, “Truth: Bankruptcy is a gut-wrenching, life-changing event that causes lifelong damage. [Y]ou know it’s a living nightmare. It can devastate your job, destroy your marriage and steal your peace of mind.”
Nearly all of my clients will tell you this simply wasn’t true for them. The marital stresses and gut-wrenching, painful experiences were the events that caused the financial troubles, the constant calls and threats from debt collectors, the financial “experts” calling them failures and blaming them for their situation, or the waiting before finally seeking legal help. Bankruptcy lawyers help relieve those stressors and that pain, we don’t cause them.
I compare it to the emergency root canal I had during final exams in my first year of law school. The pain was unbearable, but the dentist relieved the pain with the root canal. It would have been great if I hadn’t needed the root canal in the first place, but it was the best solution for relieving the pain. Same with bankruptcy. It would be great if no one found themselves in terrible financial straits, but bankruptcy may be the best solution for relieving the pain.
– Mr. Ramsey goes on to say that he will talk anyone out of filing bankruptcy if given the chance. This kind of one-size-fits-all legal advice is irresponsible. Of course bankruptcy isn’t for everyone. A good bankruptcy attorney will explain all your options once he/she understands your situation. The opposite end of the spectrum from Ramsey’s advice would be, “Some people don’t need bankruptcy, but I will still talk you into filing bankruptcy if given the opportunity.” Such a statement would be bad legal advice and equally irresponsible.
– Next, we come to a pitch for Ramsey’s services, “Most bankruptcy cases can be avoided with proper help, such as our certified counselors…” I’d go a step further and say that nearly all bankruptcy cases can be avoided, just like nearly all root canals can be avoided. If you’re content to live with the pain, no one is going to force you to treat it. I explain alternatives to bankruptcy to all my clients. When I believe one of those alternatives is in the client’s best interests, I advise accordingly. I’m not unique; any reputable bankruptcy lawyer does the same thing. Unlike Mr. Ramsey, we don’t eliminate options that may be in our clients’ best interests without understanding the individual facts of the situation.
– The article ends with this quote: “I know from personal experience the pain of bankruptcy, foreclosure, and lawsuits. Been there, done that, got the t-shirt, and it is not worth it.” If you’ve read this far, you can probably already point out the flaw in his reasoning. Bankruptcy can’t be lumped in with foreclosure and lawsuits. Bankruptcy typically is the cure for people who have already been sued or been served with foreclosure papers.
Mr. Ramsey filed his own bankruptcy years ago. I wonder why he feels it wasn’t worth it? Would he have been in the same position he is in now had he not discharged his debt? Does he believe he would have been further ahead if he’d not taken advantage of the fresh start bankruptcy provided him? Would he have preferred debt collectors to keep hounding him and garnishing his wages to keep him from getting ahead?
I’ve never met Dave Ramsey. He might be a lovely person and some of his advice might be great for certain people. But his blanket advice to avoid bankruptcy, even when it’s the best solution for your particular problems, is simply poor legal advice. If you want the “Truth About Dave Ramsey’s Opinion of Bankruptcy,” visit his website or listen to his radio program. If you want the “Truth About Bankruptcy,” contact a local bankruptcy attorney.
What do you think? Is Dave Ramsey right when he says bankruptcy should be the last resort for everyone? I welcome your comments below.
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No, bankruptcy should absolutely not be a last resort. Nothing pains me more than a client who comes into my office after exhausting all of their retirement funds and selling exempt assets in a vain attempt to pay their debts. Yes, you should pay your debts, but in the alternative, bankruptcy should not be a last resort if that has become impossible.
I agree 100%. My clients would pay their debts if they could. To those who believe it’s a moral issue, I ask if it’s more moral to feed your kids or to pay Bank of America a little more interest? To me, losing your home and squandering your retirement savings is the last resort.
The truth is that the banks themselves borrow air at near 0 percent rates and lend it out. They take your money when you deposit and get to give out loans and make money off your money. We live in the biggest scam of a system and people want to talk morality lol. Crazy brainwashing here.
Tapping retirement accounts and other exempt assets is absolutely the LAST RESORT.
It’s almost NEVER prudent to repay unsecured debt owed to private creditors with exempt assets. (A CFO who did so with corporate assets would face liability for gross negligence.)
Further, the long-term expected return on a diversified investment portfolio — especially in a tax free or tax deferred wrapper— is almost always higher than the interest rate on most non-dischargeable debt. It is thus better for most debtors to repay non-dischargeable debts more slowly than they could in order to reap the tax arbitrage and creditor protection conferred by ERISA plans and IRAs.
Indeed, it is typically wise not only to keep your retirement assets intact, but also to KEEP CONTRIBUTING the maximum possible amount to such accounts even when faced with financial distress unless and until your bankruptcy lawyer — not some moralistic puritan yay-hoo with a podcast — advises otherwise.
Personal bankruptcy allows people to restore both a sustainable cash flow dynamic and their dignity without risking an impoverished retirement.
P.S., I LOVE the root canal analogy!
Thanks for reading!
I agree that tapping into exempt assets to pay dischargeable debt should come after bankruptcy in the decision-tree.
I’m glad you liked my analogy. I can tell you that I wasn’t thinking about bankruptcy when I was sobbing over the sink with an ice cube in my mouth! (I also liked your description of the podcast host. 😁)
I couldn’t agree more. I decided not to give Ramsey any more attention. You wrote a very nice piece. As Frank said, it is NOT a last resort. It is not a first resort. It is part of an informed decision based on exploring all options. Not giving this option is either malpractice or just poor financial advising.
Thanks for reading! You’re right, bankruptcy shouldn’t be the “go to” solution for everyone. It’s one option of many, nothing more and nothing less.
For others reading this, Mr. Goldstein is a frequent poster on the NACBA bankruptcy listserv. I always enjoy reading his posts, and you should check out his blog (by clicking on his name above) for even more bankruptcy/debt relief information.
For those of you who don’t know, several years after the discharge, Dave and Sharon Ramsey paid back every penny to their creditors.
Whether or not that’s true, most of my clients would do the same if they made millions post-bankruptcy like Mr. Ramsey did. Regardless of his actions post-filing, I still believe his blanket statement about avoiding bankruptcy, no matter one’s specific circumstances, is poor legal advice.
So it sounds like the bankruptcy filing freed the Ramseys of the crushing pressure of their debt, which allowed them to create a very profitable business and pay back the creditors.
So not only was the bankruptcy beneficial to the Ramseys but it was a great option for their creditors as well.
Bankruptcy is about freeing yourself of an unbearable legal obligation. As Dave has shown, it has nothing to do with the morality of paying the debt back. Once you are out from under the debt, you can control your life instead of letting your creditors control it for you. You now have the power to create something, earn more money, and go pay your creditors back every single penny if you wish.
The bankruptcy is simply a tool that can create that opportunity you.
Exactly. Thanks for contributing, Damon!
Kris … Yours is the second claim that I’ve read of this fact, that Mr. and Mrs. Ramsey repaid “every penny to their creditors.” However I cannot find any credible source that verifies this information. Do you have anything other than hearsay?
No. They did not. They claim they did, but that is in no way true. Ramsey is a fraud that continues to defraud consumers. Timeshare Exit is a recent example.
I can’t confirm nor deny the truth of that statement (how’s that for CYA?) I’m not a fan of Dave Ramsey, but I also don’t follow him closely enough to know if he’s a fraud or not. I just don’t like his opinions on bankruptcy, when he took advantage of the system himself. I also know nothing about Timeshare Exit, but I do know a lot of my clients have timeshares they want to get out of. (BTW, bankruptcy is one way to get out of those oppressive timeshare contracts!)
I can’t seem to find anything online that verifies he paid back his creditors. Please provide the source.
This article seems to have been written by a very good and scrupulous bankruptcy attorney. I can see where you may be frustrated with Dave’s teachings. However, my parents were talked into bankruptcy 7 years ago by an unscrupulous bankruptcy attorney— and it did wreck their life and it was unnecessary at the time. I listen to Dave’s show all of the time. He normally says he isn’t against bankruptcy if you are truly bankrupt… he just tells people to do everything in their power to avoid bankruptcy. I see no problem with that advice. I wish my parents had heard that years ago.
Oh and… one thing Dave should be commended for is teaching people that they need to live within their means. They have to modify their behavior to fix the problems permanently. A root canal or bankruptcy may alleviate the pain, but if the behavior doesn’t change– the “fresh start” you get from bankruptcy or a root canal is destroyed and you end up right back in the same place. I have many family members that have filed bankruptcy (some a few times) and they are right back in a financial disaster. They didn’t learn how to change their behavior so bankruptcy only provided temporary relief. Something to consider.
Thanks for reading. I appreciate your comments.
The problem with Mr. Ramsey’s legal advice is that bankruptcy is often in the debtor’s best interests. To say, “I will talk anyone out of filing bankruptcy if given the chance,” is nothing more than one-size-fits-all legal advice. As I said above, it would be equally irresponsible for me to say that I will talk anyone into filing bankruptcy if given the chance. If bankruptcy doesn’t make sense under my client’s circumstances, I’ll advise of other options to help relieve the debt load.
I agree with your second point. Financial literacy and financial responsibility can keep some people out of bankruptcy. See my post HERE regarding spending habits. However, very few of my clients ended up in my office because they were living beyond their means. I wrote about the causes of most bankruptcies HERE. I won’t deny that there are some people who file bankruptcy because they spent money irresponsibly, but the vast majority of my clients filed because of a job loss, medical emergency, or cut in pay or hours.
I’m always confused when I hear that people file bankruptcy due to a job loss or a cut in hours as bankruptcy doesn’t generate income. Therefore, if they don’t get a job or increase their hours, bankruptcy does nothing except temporarily alleviate the pain and allow them to think they have fixed an issue when they have only fixed the symptom. As Larry Burkett said, financial problems are typically not the problem, they are the symptom. I have family members that have filed bankruptcy to take away the pain and only deluded themselves into more years of ignoring the problem.
Thanks for contributing to the discussion.
Of course bankruptcy doesn’t generate income. Anyone that says otherwise is either lying or uninformed. But I disagree with your argument that “bankruptcy does nothing except temporarily alleviate the pain” absent an increase in income. While that may be the case for some filers, it is simply not true for all filers.
Once the issue that triggered the decreased income has been resolved, the bankruptcy filing permanently relieves the debt that was incurred because of the emergency. If the issue hasn’t yet been resolved, the bankruptcy filing can give peace of mind and relief from harassing calls from debt collectors. Of course, if the client immediately incurs more debt, the relief will be very short-lived.
Yes, when writing against a specific person like Dave Ramsey it would be a good idea to interview him first.
I don’t have any issues with someone interviewing Dave Ramsey. But that’s not the purpose of this blog or post. The point is to look at what he’s said about bankruptcy and critique it. I believe he gives bad legal advice when he says he would try to talk 100% of people out of filing bankruptcy if he could.
I completely agree with Mr. Nason. I have no personal experience with bankruptcy, but what I know about Dave Ramsey is that he does in fact have a “one size fits all” mindset in all things legal, investing, financial planning. Perfect for radio sound-bites, terrible for real life.
Thanks for this review. I am considering filing and have been dealing with the feelings of moral guilt as I have been a big fan of Dave and have even taken his Financial Peace University. So of course I’ve3 been trained that Bankruptcy is a no no! The problem is that his method for repaying my debts with the income I have would have me paying for 15+ years to pay off my debts and getting more judgments all the while. I have learned to be responsible with my money and follow a budget and don’t even use credit anymore. I have debt from medical emergencies and debt from financial ignorance. As important as it is to me to take responsibility for my financial state, I can’t risk losing my income to garnishments. I appreciate your perspective and critique ofhis approach. Sometimes the Dave followers tend to think he is the only one who can give sound financial advice (I have one of them . . . ). Glad I am seeing that simply just isn’t true. 🙂 Thanks for the post!
Thanks for sharing. One-size-fits-all advice is never a good idea. Sometimes, bankruptcy is the smartest move you can make to protect your financial future. No ethical bankruptcy attorney would recommend bankruptcy for someone if it was not in the client’s best interests. And Mr. Ramsey shouldn’t steer people away from bankruptcy when bankruptcy IS in the client’s best interests.
He may have great ideas for budgeting and paying down debt when it’s possible, but his legal advice regarding bankruptcy is way off the mark and irresponsible, in my opinion.
Good luck!
Obviously you haven’t listened to Dave Ramsey for very long. Otherwise you would now that most people who think bankruptcy will fix all their problems, won’t. As an example, Dave points out that certain debts are not backruptable and therefore they may not have resolved their initial problem. Dave never claims to give legal advise as some suggest. In fact he is quite clear that he is not a lawyer and quite often recommends talking to a lawyer where applicable. And as Dave has said, if you want to figure out how to lose weight, you should speak to someone who has done the same and is currently in shape (I’m paraphrasing). You wouldn’t talk to someone who is overweight. Dave has been through a bankruptcy (because of stupid financial mistakes as he admits) and his since done extremely well for himself. Good chance that he knows what he is talking about.
Thanks for joining in.
No, I don’t listen to Dave Ramsey at all. I was only responding to his “Truth About Bankruptcy,” in which he gives terrible legal advice. (Despite claims that he doesn’t give legal advice, telling someone whether or not bankruptcy is in their best interests is legal advice.)
I agree that his bankruptcy discharge allowed Mr. Ramsey to do quite well for himself. Too bad he doesn’t believe that others deserve the same benefit.
Hi there –
I’m currently taking Dave Ramsey’s FPU but because he is on the anti-BK wagon he really doesn’t provide a lot of info if you were to feel BK was necessary for your needs…so, I was wondering if you were aware of any on-line forums (pertaining to California, Los Angeles County) that I could check out and inquire with some of my details to my specific situation and get feedback so I can decide if BK is what I would need or so I can put together a list of questions and inquiries for when I was ready to do a face to face with an attorney. And lastly, do you have any recommendations for a BK attorney in the San Gabriel Valley?
Thanks!
If you go to NACBA.org, you’ll see a button for “Find Your Attorney.” Click that button and you’ll be able to find a NACBA attorney in your area. There are a lot of good bankruptcy/debt-relief attorneys in the L.A. area. Any of them should be able to lay out options for you to deal with your debt and tell you if bankruptcy makes sense in your situation. Good luck!
I read every post and must wonder if they are selected for use only if they fit within the intent Brett? Dave Ramsey is clear in every episode of his radio program I have heard. He approaches bankruptcy from a “Christian” perspective. He (and I agree) does see a moral responsibility as well as a “spiritual” consequence to “discharging YOUR debt” so others pay it either directly or through higher cost etc.
The thought that a lawyer or any other counselor approaching this subject could be “unbiased” is absurd. Every breathing soul has been “impressions” from experiences and beliefs that form and frame their thoughts and actions. Dave’sare not reckless or unreasonable and if his advise is follows will work for anyone, … period.
We all, lawyers and lay people, persons of faith and faithless, the free spending financially able and responsible and the buried in debt all need to realize that our paths through life are not random events in a long string of chance encounters with capital.
We walk our path, we create outright path, we lose our way, we trust others to lead us, we are always making decisions that impact where we are and what be “believe”.
Bankruptcy is a VERY HARD decision to make to off load the consequences of the journey we were on while we tread our pathfinder others we will now bear the burden of our choices.
This is a moral as much as it is a financial decision that Dave Ramsey seems to embrace rather than deny and I applaud his steadfastness dispute the obvious impact his teachings have innate bottom dollar of many debt “counselors”.
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I disagree with your opinion that bankruptcy has a moral component. It’s simply a legal proceeding to help people get out from under unmanageable debt. To the extent that ethical considerations come into play, is it more ethical to feed your kids and put a roof over their heads, or to repay Bank of America? In a perfect world, most people would do both. But if there’s only so much money to go around, feeding your family seems to me to be the ethical choice. Even the Christian Bible advocates forgiveness of debt.
A lot of people have misconceptions about the “type” of person who files for bankruptcy protection. I wrote about my clients HERE. I see no reason to make people who can’t afford to pay their bills feel more guilty than they already do. In my opinion, it’s unproductive, not compassionate, and mean-spirited.
I stand by my original statement that Dave Ramsey’s one-size-fits-all advice regarding bankruptcy is irresponsible. Thanks for reading & sharing your opinions.
discharging debt is in the Bible. God actually instituted years when all debts be forgiven. Taking responsibility is a Christian ideal but so is mercy and forgiveness.
Thanks for sharing your thoughts. I agree 100%.