New father, 20, overwhelmed by $32K student debt and $21K car loan, fears bankruptcy — here’s the 1 thing Dave Ramsey says he can do to avoid it

He’s married, has a 1-year-old and is $32,000 in debt from student loans for his wife. He also has two car loans: he still owes $11,700 on his truck, but he’s two months behind on payments. He owes another $10,000 on a second vehicle, has $3,000 in personal loans and about $1,000 of credit card debt. He makes $3,500 a month.

But, according to Dave Ramsey, John isn’t bankrupt.

“You’re 20 years old. You have a baby and you’re scared. And you’ve done some dumb things that have put you in a corner, but it’s not bankrupted you,” he said.

Here’s what Ramsey advises John to do, and what to consider if you’re in a similar situation.

Common causes of bankruptcy

John isn’t alone in feeling overwhelmed. One recent survey found that more than half of Americans (58%) say their finances are in crisis as they struggle to cover everyday expenses. (2)

Common causes of bankruptcy include losing your job, being unable to afford your mortgage or getting hit with medical expenses that aren’t covered by insurance. Often, it’s a combination of one or more — you lose your job, so you lose your health benefits and can no longer pay your mortgage.

Mortgages usually make up the largest portion of household debt; in one survey of American renters and homeowners, almost 40% said they’re spending more than 30% of their household income on housing, including mortgage payments or rent, insurance, utilities and other household costs. (3)

And, if you’re spending more than 30%, then your housing is considered unaffordable, according to the U.S. Department of Housing and Urban Development (HUD). If, on top of that, you lose your job, making those payments could be challenging, particularly if you don’t have an emergency savings.

Another common cause of bankruptcy is medical debt. In some cases, a health issue might have caused you to lose your job (and your health insurance), which adds to the financial strain.

But in some cases, going bankrupt comes down to living beyond your means. Spending money you don’t have can quickly snowball into debt. And high-interest debt, like personal loans and credit cards, can quickly grow out of control as interest adds up.

As for student debt? You may not be able to get away from paying federal student debt even if you do declare bankruptcy. A process called adversary proceeding requires you to convince a court that repaying your student loan would result in undue hardship. (4)

Alternatives to bankruptcy

Bankruptcy is usually considered a last resort. That’s because it can severely damage your credit score and can stay on your credit report for up to 10 years. That, in turn, can impact your ability to move forward in life, since you may not be able to get approved for a mortgage or other loans.

And it may not wipe out your debt anyway. While Chapter 7 bankruptcy wipes away most unsecured debts, such as credit cards, payday loans and unpaid taxes, it may not wipe out student loan debt unless you can prove it would cause undue hardship. And, with Chapter 7 bankruptcy, your assets may be liquidated to repay creditors. (5)

On the other hand, Chapter 13 bankruptcy allows you to keep your assets — but you’ll have to agree to a repayment plan. You’ll then work with a Chapter 13 bankruptcy trustee to repay a portion of the debt over a three- to five-year period. (6)

Repairing your credit, particularly after a bankruptcy, takes time. Make future payments on time and eventually start establishing healthy credit habits (such as opening a new line of credit). If you still can’t qualify for credit, you may have to become an authorized user on someone else’s credit card to start building up your credit score. (7)