LAB Part 3: Considering bankruptcy? Be aware of the hard-line stance of bankruptcy critics

May 20th, 2010 by Mike Hinshaw

[Editor's note: Mike Hinshaw blogs about bankruptcy, workmen's compensation and disability issues in the United States. With a background in journalism and textbook publishing, he is neither an attorney nor credit counselor nor SSI/SSDI advocate. The following is third part in a four-part series on considerations to make before filing for bankruptcy protection and specific steps to take during Life After Bankruptcy. Part One is here and Part Two is here.]

In years past, filing for bankruptcy protection was tantamount to stamping a scarlet “F” on your forehead, publicly admitting that you’re a failure.

Investopedia warnings

In certain quarters, that attitude remains. For example,  after first noting that, among many other celebrities, “Mark Twain, Walt Disney, Donald Trump and Henry J. Heinz all filed for bankruptcy at some point in their lives,” this article at Investopedia.com warns that “For the individuals who have declared bankruptcy, the recovery process is long and difficult.”

In a subsequent paragraph, the article says: “Getting a loan of any kind will be extremely difficult for the next couple years, although it is possible to regain a better score and even some types of loans after only a year. However, the lenders that will finance you will probably be from finance companies that charge exorbitant rates of interest. In some cases, it may not be possible to get credit at all for major purchases, such as a car or home. These issues will remain for the next 10 years under a Chapter 7 bankruptcy.”

Well, yes and no–but we’ll address these issues more in a minute, and then more fully in the final, fourth part of this series. The Investopedia piece also references a page on the site of Dave Ramsey, contemporary radio’s King of Cash. Indeed, Ramsey’s “no-credit” approach may well make sense for most folks–especially those who consistently have trouble managing credit cards.

Buying a house Dave Ramsey’s way

Now, Ramsey does grant that buying a home via a good mortgage makes sense. Oh, sure, says paying cash is best, but he knows that’s an ideal situation, out of range for the ordinary consumer. Here’s his bottom-line, best tips on using a mortgage:

  • “Before you consider buying a home, you should be debt-free and have three to six months of expenses saved in addition to your down payment (more on that later). Being debt-free with money in the bank will keep you from losing your home in the event of a job loss or illness.
  • “Also, if you’re married, you should be married for at least a year before you buy a home. Don’t add the stress of a home purchase to a brand new marriage, and never buy real estate with anyone you’re not married to.
  • “If you can’t postpone the purchase until you can pay cash, buy a home with a down payment of at least 10% on a 15-year (or less) fixed-rate mortgage. Limit your monthly payment to 25% or less of your monthly take-home pay.”

For anyone emerging from bankruptcy, securing a home will probably be high on the list. If so, then, together, these guidelines represent the “gold standard” for homeownership. Of course, securing and keeping an income is job #1; depending on where you live, having a reliable vehicle is the next priority, if for no other reason than getting to and from work.

Ramsey hates bankruptcy

But back to Ramsey’s take on bankruptcy. In short, he hates even the idea: “That word sends chills up the spine. If you’re facing the prospect of bankruptcy or in the middle of it right now, you know it’s a living nightmare. It can devastate your job, destroy your marriage and steal your peace of mind.”

Following that opening, Ramsey cites a case of young woman whose soon-to-be ex-husband will be taking the brunt of their financial problems. (Unfortunately, that’s not the case for most people who need bankruptcy protection.)

Then Dave writes: “Bankruptcy is not something I recommend any more than I would recommend divorce. Are there times when good people see no way out and file bankruptcy? Yes, but I will still talk you out of bankruptcy if given the opportunity. Few people who have been through bankruptcy would report that it is a painless wiping-clean of the slate, after which you merrily trot off into your future to start fresh.”

So on the one hand, he more less concedes that bankruptcy can be a viable business decision, but then props up the straw horse that bankruptcy filers do so “painlessly” then skip off “merrily.”

Comments offer alternative viewpoint

True, bankruptcy protection does offer a chance to start over. But no qualified, experienced counselor will tell you to expect painless merriment. Also,  by the way, at least a couple of comments following Ramsey’s piece have a few bones to pick with ol’ Dave. One, from “Jen” (May 5, 9:08 am) mentions “two friends who recently had their bankruptcies discharged” and were able to protect some nice jewelry and “everything else they own.” Now, remember, this comment could be from anybody with any sort of agenda, but can’t you just hear the regret as she writes: “My husband and I just finished paying off 45,000 in student loan and home equity loan following the Dave Ramsey plan, but we had to sacrifice and do without. Sometimes, I am jealous because these two families eliminated all their debt without having to sacrifice anything.”

Again, that’s probably an inaccurate account and a too-rosy picture.  But if we can take it at face value, “Jen” not only gets caught up in the myth that bankruptcy filers get off “scott free” but also she expresses some remorse for buying into Dave’s tirade against filing for bankruptcy under any circumstances.

Here’s some highlights from another comment, this poster using the nick “Regretful” (April 27, 9:38 am): “I wish Ramsey would address those who don’t make a lot of money—$30K or less each year who find themselves in financial trouble. I have one of his workbooks, but it seems like all of his subjects make $40K or more. I’m in the process of filing ch 13 because I’m sick of never getting out of debt. I will probably never get a good paying job, so I’ve given up. My neighbor up the street is a Ramsey fan, but she works like two days a week as a home health care giver and maybe 2-3 weeks as an electrician, and she refuses to file for bankruptcy. Maybe if her house is threatened, she’ll change her tune.”

“Regretful” goes on to say that she is trying to protect her home before a credit-card company can go to court and “put a lien” on her house. Then she says,  “A friend and former co-worker filed for ch 13 and she said it’s not really that bad. Yeah, it stays on your record, but with the economy the way it is, a lot more people have filed for bankruptcy, and because of that, bankruptcy will not have the stigma that it once had.”

Looking forward to being debt free

She expresses more regret over having mismanaging credit cards and the poor outlook for jobs and then displays a pretty good take on her future as she works through her Chapter 13 repayment: “It will be a lean next three years, but after that, I’ll be debt-free and I will sock away money after that.”

To end her comment, “Regretful” had a very specific suggestion for approaching bankruptcy and coming out in better shape when emerging on the other side. We’ll take up those specific points in Part 4.

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