Dave Ramsey’s Debt Snowball v. Chapter 13 Bankruptcy


(uptempo guitar music) – Hey everybody, welcome back to the Consumer Warrior podcast. Podcast is dedicated to helping you with your big debt problems. If you’re just dabbling in debt, this isn’t the podcast for you. We deal with the big debt
problems like repossession, debt collection lawsuit,
foreclosure, bankruptcy and all those other
horrible financial problems. We’re here to help you to help yourself. Welcome back to the show. I’m your host John Skiba and I am a consumer protection attorney in the state of Arizona. I’m also a certified Ramsey Solutions master financial coach. I help people to get out of debt and to stay that way for the long haul. And on today’s episode, I want
to talk about the differences between dealing with your debt problems through a Chapter 13 bankruptcy as opposed to dealing with it through the Dave Ramsey approach
of a debt snowball, where you’re just paying
the debts off quickly, relatively quickly but
paying them off over time. And what I really want to do is dive deep into the pros and cons of both of those, and help you make a decision
whether one is going to be better for you as oppose to the other. And so I thought what we can
do is start off by talking about a Chapter 13 bankruptcy. What it is and the pros and cons of it. Now in consumer bankruptcy,
the most individuals file. Overwhelmingly most people
file Chapter 7 bankruptcy. Chapter 7 is a relatively short process. Takes about four to five months to process and it’s a complete discharge. It eliminates all of your
unsecured debts for the most part and it’s also what we call
liquidating bankruptcy. Meaning if you have assets
and are not protected under the exemption loss in your state. Then a court can seize assets, sell them and give the money to your creditors. Now the flip side of this is a Chapter 13. Chapter 13 are fairly common,
not as common as a Chapter 7, but a lot of people file Chapter 13s. One of the big reasons
is because back in 2005, they change the bankruptcy code, and if you make more than
a family of your size in your state then they often
require to file Chapter 13. Now, Chapter 13 bankruptcy
is a fairly long process. It’s usually five years. It can be as short as 36 months, but most of the cases that
we see are five years long. And what they require you
to do is to put together a plan that will be
proposed to your creditors where you are going to pay
a certain dollar amount each month and then that
money will be distributed out to your creditors. You’ll do that for a 60 month period and then at the end of 60 months, any balance owed to your
unsecured creditors. Things like credit cards, medical bills. Those types of things, any balance owed after the five years will
be eliminated or discharged through the bankruptcy. It doesn’t discharge your mortgage. It doesn’t discharge car
payments and all that. You still have to
continue to make payments on secured debts but it’s a way to deal with a lot of unsecured type debts. And the reason why a lot
of people do this is one, like I said, if they don’t
qualify for Chapter 7. But two, it forces your
creditors to work with you. If you’ve ever tried to settle debts and tried to get everybody on board particularly if you have a lot of debt, a lot of credit cards. Sometimes it can be difficult
to get everybody in agreement to accept some sort of settlement. I often say if you have
10 different credit cards and five agree to work
with you, and five don’t. You’re in this tough spot where it’s tough to do a settlement if not everybody is on board. Well with the Chapter 13 bankruptcy, it forces all the
creditors to work with you. Not only that but as soon
as you file the Chapter 13, your creditors are barred
from trying to continue to try to collect on the debt. So there’s this thing
called the automatic state that comes in place and your creditors can no longer going to call
you, sue you, garnish you. All that kind of stuff. So the mechanisms of it are you and typically your bankruptcy attorney are going to put together a plan that’s going to be
proposed to the creditors. And assuming that there is no objections or if there are objections
that you resolve them you’re going to be paying
a set dollar amount to your creditors over a five year period. How that dollar amount is calculated can be a little bit complicated. But in general what they
require is that you pay your disposable income to your creditors for a five year period. So they look at your
budget, look at your income, look at your monthly expenses. If you’re not paying your debts, how much money is left over
at the end of the month. And typically whether
that debt is $5 or $5000, that’s what you’re going to
be paying to your creditors. It is a set payment. It’s something that’s also fluid though. So if you get a job that’s
better paying three years into your Chapter 13 bankruptcy, you’re going to have to
increase the amount of money that you’re paying to your
creditors through the case. So you compare the Chapter 13
to the Dave Ramsey approach where you’re putting
together a debt snowball. Now if you’re not familiar
with this debt snowball is you line up all your debts. You list them out, usually
smallest to largest and then you start just hammering away. Trying to take care of the smallest debt and then once that’s paid for. You take what you would have been paying on that smaller debt, apply
it to the next largest debt and so on and so on. So that eventually, you’re
paying more and more to each of the subsequent debts as you settle the smaller ones. And in theory, this will allow things to be paid off very quickly
if you’re discipline in getting it done that way. The benefit to the debt snowball as opposed to the Chapter 13 bankruptcy. One, is you’re not in bankruptcy. You’re not going to have to
say that you file bankruptcy on lending applications and
things like that down the road. Two, you don’t have
anybody really looking over your shoulder like you
do in a bankruptcy court. The bankruptcy court has the benefit of having that powerful
tool, the automatic stay of stopping your creditors from doing any kind of collections against you. The trade off is you’ve
got this person known as the United States Trustee
looking over your shoulder. This Chapter 13 Trustee is
going to be monitoring things like your tax returns when you file those. You have to provide a copy to the trustee like I said if your income
goes up or if it goes down, they may adjust your monthly plan payment. So there are a lot of different things that as far as you are in this system that has some benefits to it, but it also has some big down side in that you’re in this
active case for five years and you’ve got someone looking
over your shoulder a bit seeing exactly where your money is going. And not only that you can’t
sell things or buy things without the court being involved. And I’m talking big
things like cars and homes and things like that. You have to get a court
approval to do all that. You have to get court
approval to incur a new debt. So there’s that component of it where you have the power of the court but you also have the
involvement of the court. You’ve go an active
court case for five years which can be difficult to live with, and because of that Chapter 13 cases have a historically low success rate. Nationwide it’s about, the
last study I saw showed about 35% to 37% success
rate as far as cases that went the entire five years or were successfully discharged. So the benefit to the snowball and the Dave Ramsey approach is that you are not having that oversight. You’re not having this
Chapter 13 person in your life and having to worry about
any adjustments in income or any type you need to sell assets. You need to purchase things and having to get court approval for it. The down side to debt snowball
is that your creditors are not forced to work with
you through this process. You could approach them and particularly if you’re
asking them settle the claim. If you’re wanting to pay less
than the full amount owed. They can say no and that’s something that’s totally negotiated
between you and your creditors. So you don’t have the power of the court but then you also don’t have the court meddling in your life
as far as their involvement. So as far as which is
best for your situation, I can tell you Chapter
13 is ideal for people that are facing some
type of financial crisis. If you’re in a situation where your house is about to be foreclosed on. Then you may have to file Chapter 13 to stop that foreclosure, and
then you’ll have five years to get caught up on
your mortgage payments. I see this quite a bit in my law practice where someone comes in says, “Hey, I’ve been trying
to work things out,” or the alternative is, “I’ve
been ignoring this completely. “They’re going to foreclose
on my house in two weeks “or next week or tomorrow.” We get that one sometimes. And if you’re in that situation,
a Chapter 13 is powerful and it can stop the foreclosure sale, and allow you to force
them to come to the table to get things caught up. But if you’re not in a
financial crisis situation and you’re communicating
with your creditors. You could work out something
through the debt snowball and get things paid off very quickly without having the court involvement. The only down side to that is
that you’re going to be paying typically more than you
would in a Chapter 13. Chapter 13, most cases pay anywhere from 5 to 20 cents on the dollar. Could be higher, it
varies from case to case, but generally not paying anything
close to the full amount. Or if you’re reaching
in trying to settle it or doing a debt snowball, you could end up paying something
close to the full amount. Which makes the process a little longer, but at the end of the day,
they’re debts that you incurred, and you’re obligated to pay them. So those are the pros and
cons of the Chapter 13 as opposed to the debt snowball. The Chapter 13 is fairly complicated and it typically does
require an attorney to do it. I can tell you that the success rate, at least here in Arizona where I practice, as one Chapter 13 Trustee
told a group of us. They had never seen a person
representing themselves successfully complete a Chapter 13. Just because there are a
lot of moving parts to it. So if you’re going that route, you’re looking at hiring an
attorney to be successful at it, and most attorneys fees
in Chapter 13 cases are regulated by the court. Here in 2018, in Arizona,
Chapter 13 cases typically cost $4500 plus another $300 something odd for filing fees to the court. So there’s some expense involved there. The flip side is usually
as far as a debt snowball, I help people with financial coaching, that’s why I got my certification as a Ramsey financial coach to be able to help people
to put together a plan to be able to deal with
their debt problems without having to go through that process if it’s not necessary. So if you want to learn more about my financial coaching practice or more about the Chapter 13 process. You can head on over to my website. The web address is debtfree.coach. I will put it there on the screen. If you’re watching this on YouTube. But debtfree.coach that’s
the actual website. Www.debtfree.coach. Now with all that being said that’s going to do it for
this episode of the podcast. I appreciate you listening in. For those of you who are
listening on iTunes or Stitcher, I do have a YouTube channel. If you go to YouTube, just
put in my name John Skiba. It’s S-K-I-B-A or you
can put in the search box the Consumer Warrior project. You will come up with this page, and we have hundreds of videos on here. It gives you some behind the
scenes on the podcast a bit. So that’s going to do it for this episode and I will catch you next time. (uptempo guitar music)

3 thoughts on “Dave Ramsey’s Debt Snowball v. Chapter 13 Bankruptcy

  1. Will a Chapter 13 trustee allow for 401k contributions or monthly savings at a bank? What if you are 3 years into a 5 year plan and you have an unexpectant expense like a big car repair bill, and it falls outside the court-approved budget plan? Will the trustee make allowances for that?

    Thank you for all these great videos! I've learned a lot.

  2. I tried the snowball way, it wasn't until later I found out if the cards interest rate was to high it will never work. Bankruptcy was not a option. After 3 months using this method I was gaining little ground. I started with debt settlement after talking to several people in the field.

  3. Chapter13 isn’t as scary as this guy makes it seem. Find a local attorney bankruptcy laws vary from state to state. Chapter 13 looks more favorable to lenders in the future and it stays in your credit only 7 years from date of filing. So if you do the 3 year plan or 5 you have just 4 or 2 years to go before your credit report is wiped clean. But if you own a house or car 13 is the best option. And the time you have to live on a budget helps you to adjust and live within your means.

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