In the first post of this series we asked Should a Christian Declare Bankruptcy? Unfortunately, due to the stain of sin many Christians are in situations where they must decide if bankruptcy is their best available option. As we concluded, in the first article I pointed out that churches and Christians should devote their time and energy to helping people avoid bankruptcy instead of simply banging Christians over the head for considering bankruptcy. So this is my stab at being proactive about bankruptcy.
An ideal situation would be to avoid debt all together. Obviously, bankruptcy is much less likely if you do not owe money to anyone. For this reason Dave Ramsey suggests only one rule for borrowing – don’t. However, there is a practical reality that many of us do borrow money. Therefore, it seems as though there need to be borrowing boundaries in place to help you avoid bankruptcy in the future. Photo by zhurnaly
Some of the best material I have found on this topic comes out of the book Taming the Money Monster by Ron Blue. The book is a must read for anyone who is constantly finding themselves struggling with debt issues. In fact, at the time of this writing you can buy a used copy on Amazon for a cent, plus shipping and handling.
Ron Blue’s Four Decision Making Rules for Borrowing
Rule #1 – The Common Sense Rule
“the economic return must be greater than the economic cost. To state it another way, when money is borrowed, the thing that was borrowed to purchase should either grow in value or pay an economic return greater than the cost of borrowing”.
Unfortunately, common sense, it seems to me, is financially lacking. Our cultural love of debt is transitioning in the wrong direction and what was once an outrageous interest rate is now a great deal. To expand on Blue’s thoughts let me simply say if you are upside down on an item, (owe more than it is worth) you are automatically making yourself more susceptible to bankruptcy.
When you are considering borrowing, ask yourself, “Will this item likely be worth more or less in the future?” The more the item depreciates, the more likely you are to find yourself upside down and backwards in debt.
Rule #2 – A Guaranteed Way to Repay
Blue introduces three sources to repay a loan – income, sale of whatever was borrowed, liquidation of other assets. When considering a loan it is essential that you have a plan for a worse case scenario. If we plan to give our word to repay a debt, there ought to be a way we can ensure that. For example, when purchasing a house, you should be certain that if necessary you can sell the house and repay the loan. This way you can protect yourself against a potential bankruptcy. But, what if the house goes down in value? This is why it is important to put money down on the house so that you immediately have equity in case something does not go as planned.
Rule #3 – Peace of Heart and Mind
I love this rule. Many many people borrow to the limits. The result is worry, stress, and anxiety. Bankruptcy is often the culmination of years of this type of worry. This rule, however, prescribes only borrowing money where there is so much margin that it cannot challenge your financial peace.
Rule #4 – Unity
In a marriage context, a couple should not borrow money unless they both agree that it is a ‘good’ choice.
Bankruptcy can be avoided if you have the proper borrowing rules in place. I like these suggestions from Blue. If you must borrow, then utilize these conservative guidelines. Consider changing your vocabulary away from ‘good debts’ to ‘better debts’. Remind yourself that the less debt you have, the more likely you are to not only avoid bankruptcy, but also to enjoy real financial peace.
What borrowing boundaries do you have? Anyone taken a no debt oath?