Highlights from the Dave Ramsey Show

Question: Jessie in Los Angeles has $90,000 in medical bills. He had no insurance and had his gall bladder removed. He's not working and is going to school. His mom is advising him to file bankruptcy. Dave says he doesn't have anything to take.

Answer: So you figured out for the future health insurance is important? Because it'll bankrupt you if you don't. That's what you're facing.

The deal is this. There's nothing you can do because you can't pay $90,000 when you don't have a job. So just don't pay them. That was insight. There's no point in bankruptcy. There's nothing they can get from you. You don't have anything. What are they going to do? Yell at you? What are they going to do?

You don't have anything to take. Bankruptcy would be to protect something. You don't have anything to take. They already took your gallbladder. You don't have anything else.

Here's what's going to happen, dude. You're going to come out and get your job in computer science, and you're going to be making $50,000 or $60,000 a year. Then we're going to start calling these people up, and we're going to settle $90,000 for 20 cents on the dollar by negotiating. So $18,000 or $20,000 to settle this, which is nothing as soon as you start making some money. In the meantime, there's nothing for them to do. All they could do is sue you. Whoopee. Sue me. What are they going to do? Take your shoes? You don't have anything. You're what we call judgment proof, meaning they can take a judgment, but there's nothing to get. That's kind of a good place to be for right now in the middle of this mess. Then as quick as you get a job, the first goal here is stay in Mom's basement and pile up $30,000 in cash and solve this mess.

Bankruptcy is an option, but there's no point in it. It doesn't serve any purpose. Your situation is not permanent. If you told me you make $20,000 a year and you've made $20,000 a year for 30 years, and you're never going to make any more than that because you don't have the I.Q. to ever do any better, you're stuck, and you owe $90,000, you might be bankrupt then. But that's not your case. This is a temporary situation because all of a sudden, your income is going to go from $0 to $60,000. When it does, you can solve the problem pretty quick. So there's not a lot they can do. Just tell them you're broke, living in your mom's basement, and you don't have any money. And you don't work. You can't pay them today, and you'll pay them when you get a job when you get out of school.

You do need to get a part-time job. Four years to graduate is a long track. You need to get some money coming in the meantime.

The moral of Jessie's story is get health insurance! It's not that expensive—$50 a month for most of you. I don't care about your teeth, your hair, or all that stuff. Just get major medical. If you get your gallbladder removed, it's not $90,000. That way, it's $5,000 and you could do that because all you've got to pay is the deductible and the co-pays. Carry a big deductible. The point is not the little $5,000 that'll kill you. It's the $90,000 things that kill you. Stuff happens. That's why we have health insurance. Insurance is not to cover you for the little stuff. It's to cover for the things that will break you—the big stuff. It's that little, "I had twins and they spent six weeks in the NICU." Welcome to $1 million—that kind of stuff. That's the stuff that bankrupts you. You've got to have insurance for that stuff.

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Question: Rick in New York City filed bankruptcy in 2004 and cleared it five years later. He'd like to rebuild his credit. What's the best way to do that?

Dave Ramsey's advice: I'm going to give you a different answer than you are probably used to hearing because I determined many years ago that the shortest path to building wealth is not debt. It's the opposite of debt. Not getting into debt causes more people to become wealthy more often than getting into debt.

Once I discovered that and really settled that in with all my formal financial training, I still decided that it's a really good idea to not worry about going into debt. As a matter of fact, worry enough about it to not do it. On that basis, I'd tell you that when you got turned down for the credit card, I'd call that a blessing.

I've met thousands of millionaires, and I never met one that said they made it all with their Discover points. We've been taught by the financial community, primarily the banking community, to worship at the altar of the great FICO. My goal would be for you to close as many debt accounts as you can close after paying them off.

You've been out of the Chapter 13 bankruptcy close to five years. It will stay on your credit bureau report for only seven years, but it's seven years from the closing of the bankruptcy, not the filing. Seven years from that date, which is probably only about two years for you, it will completely go off of your credit bureau report, which is good news.

I would have a weird goal for you, and that is to have nothing on your credit bureau report in seven years to not give you a score. That's because 100% of the calculation of the FICO score is based on your interaction with debt. The only way you can have a FICO score is to go in debt and pay debt. The score is not an indication of winning with money, it's only an indication that you borrowed money and are paying it back. I could give you $10 million, and it wouldn't change your FICO score one point.

That's a weird answer for you, but the only thing I want you to concentrate on the FICO score for is to get rid of it. You can buy a house, by the way, without a FICO score. Go to a mortgage company that does manual underwriting, where they do it the old-fashioned way and make sure you have a job. They are not counting on one number to make a determination on whether to get a mortgage or not.

Past that, save up and pay cash for your cars like your grandmother did. If you are going to buy something at the store, they take a debit card. I haven't had any credit cards in decades. I have just a couple of pieces of plastic in my pocket—a debit card on my business and one on my personal account, my driver's license and my handgun permit.

Cash and debit cards take me anywhere I want to go. I have traveled the world and travel about every other week. I stay in hotels and take my wife to nice restaurants and we have a nice life, but we pay for it. Just like you, Rick, I went bankrupt many years ago, and I had to stop and think about what caused this mess. What I figured out was debt caused this mess. I just decided I wasn't going to be slave to anyone anymore.

I know people think I'm a wacko and I'm just fine with that. But I'm a very rich wacko because this stuff works.

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Question: Tom in Baltimore met with a bankruptcy attorney but hasn't filed yet. He's had a small fire in his house, and the insurance company didn't want to get involved. After going to the state commissioner, they gave him $30,000. He has $25,000 left. Should he still go through with the bankruptcy?

Dave Ramsey's advice: No, it doesn't sound to me like you're bankrupt. If the question is can you get away with filing bankruptcy, the answer is yes. If the question is are you bankrupt, the answer is no. I can see a guy making $50,000 or $60,000 a year paying off $25,000 in debt pretty quickly after he used his $25,000 to clear up a bunch of the other. So what would I do if I were in your shoes? I would pay my car off, and then I would begin to work deals with the rest of the money and try to see who would settle some of this credit card debt. You might clear almost all of it by settlements at $.50 on the dollar. And then why would you have filed bankruptcy? It would have been foolish to. You can get a fresh start and trash your credit. Right now, your credit's bad, but there's a lot of difference between Chapter 7 bankruptcy and a $3,000 problem.

I think what happened was you were on one track, something happened, and you're going to have to have the courage to get off that track because you have a different set of circumstances and a different set of decisions to make after the fire. You were on one track based on where you were. We could argue about whether that is good or not, but that's not our reality for the day. For the day, it is plus $750 a month and plus $25,000 in your pocket, which makes you nowhere near bankrupt. You've just got to make the decision that you're not.

Asking a bankruptcy attorney if you're bankrupt is like asking a dog if it's hungry. There are legitimate ethical bankruptcy attorneys, but I don't think a legitimate ethical bankruptcy attorney would give you the advice you're getting.

I understand how we got here, but the point is we're here. Based on where we are today is the only way we need to make decisions—not based on where we used to be.

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