Did Dave Ramsey Really Pay Back His Creditors After Bankruptcy?
Dear Steve,
I have a question about something I read that Dave Ramsey said. He said he went back and paid his creditors years after his bankruptcy even though he didn’t legally have to. Is that even possible?
I’m only asking because now that we are in a better financial situation, we can afford to buy a truck in cash for around $35,000.
I wasn’t sure if we should instead pay our old creditors or if we would look bad in some way buying a truck with cash less than a year after getting a bankruptcy.
Lea
Answer:
Dear Lea,
There is no way for anyone to know what another person did, but in general, I call BS.
A creditor can’t collect on debts discharged in bankruptcy. Once the account goes into bankruptcy, it is closed to additional payments. I learned that firsthand when I tried to repay my discharged creditors in 1990.
Now, Dave Ramsey may have sent his creditors money they applied somehow, but I very strongly doubt it was to his old accounts.
But Why?
I understand the moral issue some people feel about repaying past debts. I felt that way about my bankruptcy debts. However, logically it does not make financial sense.
The more brilliant move would be to learn from what led to the bankruptcy, set yourself up to not get in that spot again, and use any money available to save for retirement so it can grow for when you need it later in life.
The debt owed in bankruptcy is already legally discharged and written off by the creditor. Interestingly, the Bible talks about debt forgiveness but does not say anything about repaying the debts afterward.
“The Bible expressly grants permission for Christians to file bankruptcy: “At the end of every seven years you shall grant a release of debts. And this is the form of the release: Every creditor who has lent anything to his neighbor shall release it; he shall not require it of his neighbor or his brother, because it is called the LORD’s release” (Deuteronomy 15:1–2).” — Source
Do Better Moving Forward
I also struggle to understand the concept of trying to repair the financial past when that ship sailed. We can, however, do better moving forward.
Let’s say you took the money to pay back your creditors instead of investing it for retirement. That money could return you $500,000 to $1,000,000 at retirement. Does losing that retirement savings you will need to depend on make it a smarter choice?
I Don’t Understand the Dave Ramsey Avoid Credit and Debt Approach
Dave preaches people should avoid credit cards and debt. Pay for things in cash. And a bunch of other things that make no logical sense. Author Helaine Olen even talked about it in her book Pound Foolish.
Dave says to avoid credit cards and use a debit card. A debit card puts you at more financial risk and does not build your credit score to reduce the cost of future services.
Dave says to pay for things in cash. But if I could borrow money for a vehicle at 2.5% and put my cash into investments returning 10 percent or more, like Down Index Funds, why would you not do that?
If the kneejerk answer is you have to avoid debt to be a good steward, why are you not a better steward for earning the higher return on the money you were given?
As an example, look at the Vanguard VTSAX fund
Mathematically, which makes more sense, tossing away a 16.6% return on $35,000 or paying 2.5% for a car loan while you invest the funds?
If you made a $35,000 one-time deposit into an investment that returned a straight 16.6% it would be worth $16,293,337.79 in 40 years.
If you received the 8.2% return since the inception of the Vanguard fund, your $35,000 would still be worth $818,763.
Here is what Vanguard shows for actual fund returns based on $10,000 invested ten years ago. It would be about $48,000.
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That better be one exceptional truck!
The Logical Approach
While contemplating the math, rather than the emotion, think about the importance of rebuilding your credit after bankruptcy by getting more credit cards to report positive information that will lower future borrowing.
Rebuilding credit should begin on the day you receive your bankruptcy discharge. You can read how silly easy it is to do here.
Don’t Let Anyone Tell You What to Do
I love the fact you had the confidence to ask me your question. But it would be best if you did not let me or Dave Ramsey tell you what to do. In a perfect world, I will have given you things to think about and research, and then you can come to a confident decision about what you want to do.
After you think about what is best for you if you want to throw away millions of future dollars for a truck and you can explain the decision and feel good about it, do that.
By the way, make sure you are building a boring old savings account to use in case of an emergency. That will go a long way to keeping you financially safe moving forward.
You are not alone. I’m here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don’t give up.
Steve
Originally published at https://getoutofdebt.org on October 15, 2021.
