I know, I know. Going against my word and writing about debt again. But you know, consumer debt and how we cope/deal with it is something that still interests me deeply. Although I have written about different aspects of debt, including how to pay off debt, the role of frugality, the stages of repayment, strategies to follow and different debt solutions, it still fascinates me. I suppose I’ll have to write a book about this stuff just to get it out of my system and stop filling my readers ears (OK, eyes) with stories about debt.
Today, I would like to get back to debt solutions, really. Because we paid our obscenely large debt off in record time (£100,000/$160,000 in three years); but was this the right thing to do?
If you are wondering where this stuff is coming from and whether I have lost my moral bearings (which by the way are stout as a peasant from the Balkans) let me tell you a story.
We were so pleased with paying off our debt and so proud with achieving something many people around us thought was impossible (let’s put it this way: when I told our financial advisor we intend to pay it off in three years or under he laughed – he just thought I am making a really funny joke) that when a journalist from a major online publication contacted me I agreed to an interview. This was fine; and I received loads of nice private messages.
What slightly surprised me were the comments. One of these said:
“Why would any sane person with that much debt ever pay it back?”
And another one stated:
“Stupid people. They should have filed for bankruptcy…”
So, you see, one questioned my sanity and the other my intelligence. Which I don’t usually mind so much: my friends call me ‘insane’ for running long distance all the time; but it has been roughly forty two years since I was on the primary school playground and someone called me ‘stupid’. All this because we paid off our consumer debt!
Feelings aside, this made me think about the other options and to re-examine the choices we made.
As the person who called me ‘stupid’ helpfully pointed out one possible debt solution is bankruptcy. However, this would have meant:
- Going to court and I am not very keen on that although being a lawyer is a childhood dream of mine; then again, this came after spy and astronaut.
- It is public and I would have lost loads of credibility and face; doubt we academics can lose our job when going bankrupt.
- According to the rules debtors can retain their occupational pensions; the documents claim that there are exceptions, however.
- Difficult to get a bank account and, quite understandably, any form of lending can be very tricky.
- We wouldn’t have been eligible anyway because the equity in our house would have covered the debt several times. This means that we could have sold our house (without going bankrupt) and paid it off without the three years of struggle. Hold this thought.
Another option, would have been to do an IVA (Individual Voluntary Arrangement); which is similar to bankruptcy apart from the part where you are asked to sell all your assets. In the case of IVA, one can be asked to release up to 75% of the equity in their home (if they have any). If they don’t, the matter can be re-opened four years into the IVA.
Yet a third option, would have been to sell our house; release enough equity to pay off the debt and buy another house with a small mortgage. After all, we always had a rather high net-worth and it is an entirely different matter that it is ‘structurally wrong’ (all in non-income generating real estate and pensions).
Why didn’t we take any of these options?
Well, asking this question in the case of bankruptcy and IVA is a bit like the question in Monty Python: what have the Romans ever done for us?
[Not much apart from aqueducts, sanitation, wine, roads, irrigation, medicine and education…but, if you haven’t seen it you better watch the movie.]
Now, why we didn’t downsize and get it done and over with, is a much more serious question.
And my honest answer is:
- Because doing anything other than paying off our consumer debt systematically and over a period of time would have deprived us of the opportunity to learn and implement the important principles of money.
- Because paying off our consumer debt taught us how to build wealth rather than dissipate it.
- Because the fact that we paid off our consumer debt still makes me blush with pride.
- Because paying off our consumer debt is a great lesson for our sons: both about money management and honourable behaviour.
- And finally, paying off this consumer debt was my redemption; I left my irresponsible, wasteful self on the altar of consumerism and came out leaner, stronger and so much more present.
Why would I forego all that?
Do you think we made the right choice? Would you have chosen to pay off your consumer debt or take another option?