I was just over on the blog of Dan Nunley, an Oklahoma bankruptcy attorney.
He has a fantastic post on his site about Dave Ramsey and his aversion to bankruptcy. It is a post worth reading and the comments as well. It provided a good look at different points of view about Ramsey’s zealous effort to help people to avoid bankruptcy.
Here is what Dave Ramsey says about bankruptcy on his site.
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.
Don’t let anyone fool you. I have been through bankruptcy and have worked with bankruptcy for decades, and it is not a place you want to visit. Bankruptcy is listed in the top 5 life-altering negative events that we can go through, along with divorce, severe illness, disability, and loss of a loved one. I would never say that bankruptcy is as bad as losing a loved one, but it is life-altering and leaves deep wounds both to the psyche and the credit report. Source
I find that position to be a gross disservice to people in trouble and an exaggeration of the truth. Because the path contained some pain, does not mean it isn’t the best path to follow. Sometimes the most appropriate treatments are. Should we avoid heart surgery because it is painful even though it will save our life or make it better? Besides, credit report wounds can be easily healed.
People who go bankrupt, as Dave himself did, are most often better off financially after a fresh start, as Dave was. But Dave has built a very profitable following based on his position that his recommended path is somehow better, more evangelical, or appropriate in some divine way.
As someone that has lived through bankruptcy, the trials of debt, and spent every moment since 1994 helping people find a way to overcome their debt situation I’d like to offer my point of view.
Several commenters on the post noted that living through financial problems is a mentally taxing event. It is. In my studies I found that 40% of people living through financial troubles are clinically depressed.
The survey found that 49.3 percent of people with problem debt can be classified as depressed, of those 39.7 percent report symptoms of severe depression. In comparison, studies have shown that 9.5 percent of the general population is clinically depressed.
In August, 2001 we surveyed 136 clients whose unsecured debts range from $1,000 to more than $100,000. Their ages range from 21 to 77 years old; incomes range from $6,000 to $165,000 per year. Participants were asked a series of questions about their financial situation and mood states using the Center for Epidemiological Studies Depression Scale (CES-D), an industry standard for measuring depression. They also were asked about other psychological factors such as social support and optimism.
“Single women are at the greatest risk for depression related to financial problems,” said Steve Rhode. Depression is typically thought of as a combination of feelings of hopelessness, inadequacy and other negative emotions and behaviors.
The survey found that 58 percent of women reported mild and major signs of depression, compared to 36 percent of men. More than six out of ten women reported their level of debt to be very bad, while 46 percent of men described their situation that way. Women think about debt troubles more often than men, and feel less competent to solve their problems. More than half of women reported their stress level to be high or very high.
“For women and men, too often financial problems equal depression,” said Rhode. “The survey found that it doesn’t matter how much debt or income a person has. In fact, many of our clients have incomes exceeding $100,000 a year. Depression affects people who have high and low debt and income.”
The survey found that nine out of ten of all debtors feel some stress over their financial situation. Stress is commonly defined as emotional strain that manifests itself as fear and/or anxiety. Almost 50 percent of the respondents said debt caused their stress level to be high or very high. Seventy percent of respondent said they think about their debt very often or constantly.
“Depression creates an inability to conquer financial problems,” said Psychologist Joe James. “People become emotionally paralyzed, which leads to the inability to develop a plan or take action and compounds their financial problems. This is why people who are having money troubles should get extensive professional help as soon as possible.”
And in my humble opinion I don’t think that we best assist someone to live through a well intentioned path of bankruptcy avoidance simply to avoid bankruptcy, a path that may be considered punishment, at a time they may be lowest in their life. Whose goals are being served by that course?
The process of bankruptcy can result in the teachable moment for those that will hear the message, which is most. Less than 8% of Chapter 7 bankruptcy filers file for bankruptcy protection again. (Source) The emotional pain of loss and the process can result in a lifelong desire to avoid such pain again. In fact it often results in the detrimental avoidance of credit which is more harmful than bankruptcy.
I do object to declaring that those that choose to embark on the path promoted by Dave Ramsey to avoid bankruptcy are somehow better because they lived in deprivation to make amends and meet their goals. And I’m left asking what the success rate is of Dave’s approach in the elimination of debt by all who try. There does not appear to be any transparent public data to support his path as a better route to overcome immediate financial problems.
I spent many early years telling people to avoid bankruptcy as well but upon introspection that was more about my internal voice than what was the best technical tool for that person at that moment in their life.
If Dave wanted to promote a path that worked best for the individual, he would promote the investigation of all methods to allow the individual to make a fully informed decision about what is best for them in their individual situation. Financial peace does not come only from the purchase of his Financial Peace University books, tapes, seminars or consultations. There are more ways to a destination than just Dave’s road. And for some, the best tool to accomplish the task at hand may be bankruptcy.
Bankruptcy is the only route out of debt that provides the individual with any legal rights and protects them from unfair creditor actions, judgments, wage garnishments, etc. And at a time when the social safety net is strained to breaking or is falling apart, bankruptcy serves as a way for people to recover from traumatic situations without the access to or demand for additional social welfare programs.
One point that is often missed in the avoidance of bankruptcy discussions is that someone can go bankrupt, receive the protections available under the law, and still repay their creditors because they have a moral belief to honor that obligation. I wonder if that is what Dave did? I took that approach and tried to but actually had some creditors ask me to not send payments. A subject of a future post.
Forcing people to live a path certified by Dave Ramsey because of his personal experience and his emotional scaring is a disservice to many who are suffering with depression, pain, emotional trauma and difficult life situations as a result of their current financial misfortune.Dave Ramsey - Bankruptcy Bigot or Personal Finance Saint? by Steve Rhode