Dear Dave: My husband is in the middle of serving a five-year prison sentence. We have a 9-year-old son, and we’ve sold our home and everything else of value just to get by and pay off debts. I’ve managed to pay off almost everything, but we still have about $20,000 in debt from credit cards and a car note. Our rent is $375 a month, and the car payment is $400. My husband was making about $100,000 a year before he was incarcerated, and the only income we have now is my monthly disability check of $1,478. Should I file Chapter 13 bankruptcy? –Samantha
Dear Samantha: I’m really sorry you and your family have been put through all this. You’ve endured a real mess the last few years, and I know you’ve fought like crazy to keep things afloat the entire time.
First, there’s no reason for you to file bankruptcy. Chapter 13 is a payment plan, and right now you can’t make payments, keep your lights on, and feed your child. The credit card companies can wait. I’m not going to beat you up over those last two debts, especially after all the stuff you’ve been through and how hard you’ve tried, but there’s no way a car payment fits into your budget, kiddo. You need a little $1,000, paid-for car, not a car payment. You can’t raise a 9-year-old on $1,478 a month when more than half of that goes out the door for rent and a car payment.
I want to help get you back on solid ground so you can start growing again. I don’t have a magic wand that will turn $1,400 into $14,000, but I do want to pierce through your pain and love you enough to help you realize that you need to look at the figures and do some math. You’re not stupid, Samantha. You’re an amazingly courageous person. But you do need to sell that stupid car! —Dave
Dear Dave: Do you ever recommend someone selling their house to get out of debt? –Andrea
Dear Andrea: The only time you’ll ever hear me tell someone to sell their house to get out of debt is as an absolute last resort. If there’s just no other way to turn a corner, then it might be an option. Another would be if you don’t really like the house, and you’ve considered selling it anyway. The third situation would be if the house is just too darn expensive. If you’re sending half of your monthly income to the bank to make house payments, then you’ve got way too much house!
But most of the time the house is not the problem in these kinds of situations. There’s usually lots of other stuff, like credit card debt and $700 car payments. I’d sell a car in a heartbeat before I’d ever consider giving up my home. Think about it, Andrea. Being forced to sell your home in a case like that would be an emotionally devastating experience. I mean, it’s your home.
And the truth is that in some places it would be a pretty good idea to hang on to a house. A lot of markets are already recovering at a rapid pace, and the real estate market in America—with the exception of a few trouble spots—is a lot more alive, dynamic and fluid than many news outlets would have you believe. There are some seriously good real estate situations out there right now! —Dave
Dear Dave: My mom filed bankruptcy about five years ago, and I thought that taught her a lesson. She’s on disability now, and makes only $600 a month. On top of all this, she’s piled up about $30,000 in credit card debt again. She’s even paid her utility bills and bought groceries with credit cards. I don’t know what to do. –Barbara
Dear Barbara: She can’t file bankruptcy again, because it’s still too close to the date of her first filing. It sounds to me like she’s going to have to face up to what she’s done, and make some serious behavior changes. The kind of stuff she’s doing is not only addictive, it’s self-destructive. She’s trading a moment of pleasure for years of pain while that credit card bill grows into a monster!
Personal finance isn’t rocket science. It’s 80 percent behavior and 20 percent math. Plus, there are plenty of agencies out there that help disabled people find jobs and help them remain active and productive in the workplace. When it comes to work, disabled doesn’t always mean unable. It’s amazing what people with disabilities can do, but the hard truth is that she’s still going to have to find a way to get her income up and cut her spending way down.
Sit down with her, and try to explain what’s happening and what she’s facing in a kind and loving way. Walk her through the process of making a monthly budget, too. You may run into some resistance, because parents often have a hard time accepting help from their kids. I call this “powdered butt syndrome.” Once someone has powdered your behind, they don’t always want to listen to your advice!
She can turn this thing around, Barbara. But it’s going to take some persistence on your part to help make it happen. —Dave
Dear Dave: I leased a car about two years ago, and I’m just now beginning to realize that it was big mistake. I’m throwing away tons of money. Is there any way to get out of a car lease? –Randy
Dear Randy: Now you see why I call it “fleecing,” don’t you? Never do a lease! It’s the most expensive way to operate a vehicle.
Call the company and ask for the early buy-out or pay-off amount. Then, compare that figure with the value of the car. If the car is worth $19,000, and the early buy-out is $21,000, you’ll have to scrape together $2,000 to make up the difference.
If you don’t have that kind of cash sitting around, go to your local credit union or bank and get a small loan of $3,000 to $3,500. This will get you out of the “fleece,” and give you some cash left over to buy a little beater to drive for a while.
Get this done, and pay the loan back as quickly as possible. Then, you can start saving up to pay cash for a really good, used car later! —Dave
Look for more advice on personal finance from Dave Ramsey in each issue of WEALTH magazine. For additional financial help, visit daveramsey.com.
