The Basics of Bankruptcy

from daveramsey.com on 20 Apr 2007

I put bankruptcy in the same category as divorce—no one thinks this is a great idea. Even though they do everything possible to avoid it, sometimes good people have to go through it. Even quality bankruptcy attorneys will tell you it is a last resort. The fear, the shame, the guilt—it turns your world upside down.

Sadly most people who file bankruptcy have simply lost hope and can't see another way out. They've given up. About 90% of the people who come to our office or call my radio show have another way out but are too wrapped up in the emotions of the situation to see other options. But when youre standing on the outside and not in the middle of the financial mess, it's easy to see other alternatives. By selling the car, taking an extra job, living on a budget, having a garage sale, quit paying this or that most people can make it out of the hole. There may be some dings on their credit but its better than filing bankruptcy.

There are two main types of consumer bankruptcy:

Chapter 13 means the court approves a plan for you to repay your debts over time.
Chapter 7 means the court sells your assets in order to pay back as much as possible, with some exemptions that vary state to state, to allow you to keep some personal items and maybe some home equity.

But keep in mind bankruptcy doesn't completely wipe the slate clean because in most cases you can't eliminate child support, alimony, taxes, and student loans.

What To Do

If you are at the bottom, the place to start is with the basic necessities. Fourth-grade civics class taught us necessities are: food, shelter, clothing and transportation. Today we also include utilities. First make sure food and utilities are taken care of. Then make sure your rent or mortgage is current, and lastly the car payment is up-to-date. Don't pay anyone else until these are done.

Sell everything in sight to make it happen. Spread any leftover money across your other bills to keep the creditors as happy as possible. This plan allows you to live to fight another day. But if you are current with MasterCard and about to be evicted, you will quickly lose hope. If you've already filed bankruptcy, you can get past it. Everyone I've ever met who has been wildly successful has failed at one point or another. They built success by learning from their mistakes instead of carrying them around and wallowing in them. Make sure you learn from the experience because you dont want to do stupid twice.

There is life after bankruptcy, I know, but if you can find any way to avoid it you should.

If you need a trained individual to talk to, contact the financial coach in your area.

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I have been self employed for 7 years. Work has been great. Then last January we lost a HUGE job due to cut backs. We already started this job, so equipment had been rented and people employed. This caused us to lose $130,000. We stayed afloat by using our own personal money and paying people what we owe them like that, but we could not find other contracts big enough to pay this off. Then, when we got behind with the rental equipment (bc even though we did not use it, we still had to pay) noone else would give us much work. It has been horrible. We have NO personal debt except mortgage($1000/mth) and car payment ($240 a mth). We never spent frivalous. Now we have $140,000 in debt. I have 4 children and my wife always homeschooled. The schools are horrible here, and we can not afford to put all 3 in private and one in childcare. We tried to find her a steady night job but she never gets a call back since she has only worked the family business for 7 years. If I go and get a 8-5 job I will never pay this back in time, because lawsuits are pending. I don't have the degrees to enable me to get a high paying job. I only know how to do what I do. And work is scarce. I have been advised to file bankruptcy over and again, but have been trying to figure out what other options we have. We are christians, and want to pay them back. But, they won't accept the little we can pay each month. We tried that and they still proceeded with sueing. If you have advice we will be glad to hear it.
Max March 15 2010 2:23 PM

I, not unlike the previous comments, take it to heart when somebody who may be considering bankruptcy for reasons of being stupid. Not, when one has done everything possible not to get to that point. After five losses of jobs, divorce, attorneys, supporting family members and high prescription bills (by the way, no health insurance), I bankrupted myself. Perhaps bankruptcy, is a form of a message to the banking industry to be more responsible and less greedy in the architecture of lending. Non-theless, Dave Ramsey' teachings are excellent "to do something different not to end up in the same situation. That would be "Stupid". To the geniuses in government, they should put that in practice too. Invest in job creation (not in job exportation). Allow us to have earned income from our work, and pay cash for our basic needs. LET IT TRICKLE UP. You know where trickle down took us.
Carlos Buschiazzo February 26 2010 12:46 AM

Ditto to what Terri just commented! The past two years has been a living nightmare for us as well. Actually, the past ten years. Trying to keep everything afloat and living for the credit score. Well, FICO does not pay my bills and I am ending the game now. We HAVE tried everything, always tried to do it ourselves, but I have no more shots left. Exhausted, burnt out, frutstrated, and buried. We flat out need a drastic new game plan, and there just ISN'T enough money coming in. We cut up the cards eight months ago, but cannot afford to pay them and have exhausted all ways of doing so. We have ALWAYS done what we are "supposed to do" and honestly, it has not worked for us. We are played out. Bankruptcy for us cannot possibly make us worse off than we already are.
Amy B February 11 2010 1:16 PM

Dave makes it sound like bankruptcy is failure that is always due to stupidity. I'm the Mom of two little ones, my husband has been out of work for over a year (!), and any income I could make would go towards the cost of the childcare necessary to enable me to work. I have watched him try everything he knows to try, while we have had no choice but to live on credit to feed our children. We did everything right, we had a nice savings account, and we had zero debt before his company folded. We have not been stupid, and we are not here because of stupidity. After one year, we still have no income. We have given up everything, and the house and cars are next. What other resource do we have, Dave? You say bankruptcy turns your life upside down, and is a marriage destroyer. But the hell we have lived in while trying NOT to file bankruptcy for the past year has been both. How can bankruptcy be any worse?
Terri January 27 2010 6:48 PM