Recently on our legal forum a user asked, “My wife and I are having a disagreement. We currently have $40,000 of unsecured credit card debt on one card with several other smaller amounts on other cards. We also have another $20,000 of school loans. She wants to file bankruptcy and start all over again. I want to repay the debt using Dave Ramsey’s Debt Snowball Plan. What do you suggest?”
Filing Chapter 7 bankruptcy and discharging debts
First, it’s important to understand what bankruptcy will and will not do for you. Assuming you qualify to file Chapter 7 bankruptcy, you probably would be able to discharge your unsecured credit card debt.
The discharge, however, does not come without a price. In fact, a trustee will be assigned to your case and will have the legal authority to liquidate any assets which are not exempted from the bankruptcy estate. Additionally, you may also see a significant drop in your credit score, you may have difficulty getting credit in the future, and you may not be able to buy a house for years.
Another consideration is the school debt which will not be discharged unless you can prove undue hardship. Although this may be possible, it will take additional work and you may want to consult with a bankruptcy lawyer to discuss your options.
Is bankruptcy the best option?
Given the information above, you need to consider if filing bankruptcy is right for you. Also, assuming the debts were accumulated from overspending and not some catastrophic event, you need to decide if you and your wife have broken the habits which got you into trouble in the first place. If not, you may find that even if you file bankruptcy and discharge your debts, in a few years you are right back where you started.
Benefits of Debt Snowball Plan
You also asked about the Debt Snowball Plan. This is a plan popularized by the financial guru David Ramsey. In a nutshell, it calls for debtors to stop all payments except for minimum payments and start putting all of their extra money towards paying off their smallest debt first. After the smallest debt is paid you then step up to the next smallest until you have paid off all of your debt.
Although this goes against conventional wisdom of paying off the highest interest credit card first, Ramsey claims the benefit debtors get from eliminating accounts more than outweighs the costs they might save by paying higher interest cards first.
Why the Debt Snowball Plan can help you
Let’s assume you do decide to use the Debt Snowball Plan. Paying off your debt is not only extremely satisfying, but using this payment method, in conjunction with creating a budget and sticking to it, can help you and your wife develop habits that can keep you living within your means for the rest of your life.
You and your wife have several options. There are pros and cons to both options. Do your research and find out what option is best for you.
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