We Tried the Dave Ramsey Snowball Approach But it Got Us Nowhere. – Janet

“Dear Steve,

My husband and I thankfully are still employed. We make about 175K combined per year. We have 52K in credit card debt, and our home has no equity (took out equity to pay off debt about 5 years back…big mistake.)

I used to get large bonuses (and we would pay down debt) however the comp plan has changed. We went to NCCS and they helped us establish a budget, but did not recommend we go on a debt plan (because my auto had 175Kmiles on it, and I needed to purchase a new one. They suggested that we try to settle with credit cards on our own, however I have not had any luck with this. We also have a special needs son, and I lose sleep every night thinking about how he is going to be provided for after we are gone (we only have about 150K in 401K savings…

We can’t seem to get ourselves out from under. We don’t buy new clothes, electronics…we live paycheck to paycheck. We have home repairs (leaking showers, broken fences that we can’t afford to fix. And selling our home is not an option (we would be in the red on the deal as the value has depreciated.)

We tried the Dave Ramsey “snowball”, but we never seem to have any extra money to pay more than the minimum payments on our cards. We are current, however we did have a bad month in Aug and got behind on some of our min payments. We are slowly trying to make it up (to get current) but the credit card companies charge late fees if you have any portion of a past due balance.)

Should we seek bankruptcy advice? We feel that we need to pay back our debt, however when we look at how much we have paid in interest/fees over the past 2 years, it looks like the credit card companies have us right where they want us. (in an unending vicious cycle..) We are a Christian family, and feel that even though we feel that the interest is unfair, we still made the choices to use credit…and should pay for it. What do you recommend?

Janet”

Dear Janet,

Thank you so much for submitting your question for me to answer. I appreciate your trust and confidence in me. What I am about to say is solely from my point of view. There is no perfect or one solution for every situation. I think we need to look at your situation from a comprehensive point of view and see if there isn’t a solution that can address the most issues and result in something that will allow you to better move forward with your life from this point.

Now, let’s put aside all the guilty and self-loathing that you may have accumulated as a result of your situation. The conflict between what many preach about what a good Christian should do about finances is often in great conflict with the reality of what people should do. Believe me, I’ve helped my share of ministers, pastors, and priests with their financial problems over the years.

I’m not saying that a solution is going to be anti-Christian, just that you need to carefully evaluate it and because if might be different that what people like Dave Ramsey might say, does not make it wrong. For example, Dave Ramsey is very vocal about bankruptcy being evil or wrong. In fact, that is a position I have written about before and feel his position is not correct. See Dave Ramsey – Bankruptcy Bigot or Personal Finance Saint?.

I’m not trying to slam Dave Ramsey here. I’m just trying to give you a framework that there is more than one way to solve this problem and boxing yourself in with absolute beliefs is not helpful.

So let’s look at your situation. You have some money saved in a 401K, excellent.

You are freaking out about caring for your special needs child, prudent.

You realize that you are one paycheck away from disaster and that the current situation is not sustainable, insightful.

The dilemma that you face is not that you don’t want to repay your debts, but that the minimum payments and penalties are more than you can handle. On $52K of credit card debt your monthly minimum payment is around $1,100 and that does not even include the interest and penalties you are being hit with now.

Your inability to keep up with important house repairs speaks volumes. These repairs are necessary to protect your investment but you are stretched so thin that it is difficult, or impossible, to make these repairs.

Probably the most important question you need to ask yourself is if you have a greater responsibility to repair the past, or the future. The future is the right answer.

I am always amazed that people rail against bankruptcy like you are going to go to Hell for filing bankruptcy. You are not. And there is nothing that says that even if you go bankrupt that you can’t still repay your debts for any moral or religious reason.

In my humble opinion your situation comes down to one of good stewardship and responsibility. The most prudent solution in your situation is not one that begins with self-flagellation. No, the most prudent solution is to address all the issues at one time and then move forward and do a better job.

I think you need to strongly consider downsizing from your current house and look for a rental property. This could be a house but it needs to be something where the landlord is responsible for regular repairs. Owning a home is not just about what the mortgage costs, but all the extras that go along with it. And those add up.

Next, you need to leave that 401(k) money where it is, protected.

Finally, you should consider going bankrupt, and here is why. Bankruptcy will allow you to hand the house back to the bank and discharge your credit card debt. This reduction in obligations will allow you the best and greatest boost in your ability to start saving money each month. You can use part of the savings to repay your creditors on your terms and you can save the rest in a mutual fund or savings account to build up a financial cushion to care for the future needs of your special needs child.

Let me address another common guilt center of your situation. By going bankrupt some will scream that you are violating your promises you made to your creditors. You are somehow now a liar and a cheat. I don’t think that is true at all. Life is about a constant series of dynamic situations and demands. Is the farmer that loses his crop to a flood and then unable to make his mortgage payment a liar or a cheat, or is he one impacted by unforeseen consequences?

Financial and credit agreements are written as absolutes without any consideration of life as it unfolds in front of you. The credit agreement says you need to make this payment every month or else. Life just doesn’t work like that. We have no single idea what tomorrow will bring. it might bring marital uncertainty, accident or illness. We might die in our sleep. Who the hell knows.

But there is another promise that you made, and that is to your son. You have a duty and an obligation to care for him and to protect him. He needs you to harbor him in a good environment, and keep him warm and safe.

The Bible is filled with choices that were made and those choices had consequences that impacted others. Was the impact to others immoral or the breaking of the peace or a lie?

Janet, please do me a favor, find a local bankruptcy attorney for you to go talk to, and there are many Christian bankruptcy attorneys out there as well. After you talk to the attorney don’t feel like you need to make an immediate decision about what to do. Think about it for a few days, pray about it, and then let me know what you decide to do.

Oh yes, the reason the debt snowball approach is not going to work for you is simply because you are stretched beyond your limit and don’t have any money to apply to it to make it work. That approach is not going to do it for you.

Please update me on your progress by

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