How to Not Be a Debt Slave

by Philip Brewer on 1 February 2012 6 comments
Photo: Bigstock

It's best not to get in debt at all, of course, but it's easy to accumulate debt without even really thinking about it. Your parents and guidance counselors tell you that a first-rate college education is worth it "no matter the cost," so you sign the loan papers to borrow whatever the financial aid office says you need to borrow. (See also: Student Loans: How to Make Post-College Decisions)

Even if you have second thoughts before the end of the first semester, you're already on a path that's pretty hard to get off of. Because, after all, what are your choices? Aside from the option of being a deadbeat, which is pretty unappealing, you really only have one — proceed to get an education, get a job, and put in as many years as it takes to pay off that debt.

The deadbeat path is a poor choice, especially for student loans (which generally can't be discharged in bankruptcy, although there is a new program for eventually escaping student loan debt).

This is because your creditors have serious powers to extract money from you:

  • They can seize any collateral that you pledged for your loan (although usually they'll only go to the trouble for the big stuff — your house, your car, your business).
     
  • They can seize any amount that you have in bank accounts (although your retirement accounts and anything you have coming to you from Social Security are supposed to be protected).
     
  • They can force your employer to give a big chunk of every paycheck to them — even if it's less than your minimum payment, meaning that your debt is still growing every month.

They can't technically have the police throw you into jail for not paying your debts — but they can have the police throw you into jail for failing to respond correctly to each and every item of paperwork when they sue you. And, since you can't afford a lawyer, that amounts to pretty much the same thing.

Does this amount to slavery? I think so. On the scale of historical forms of slavery, the level of violence is pretty low, but your freedom is severely constrained — you either do whatever it takes to make each and every debt payment, or your creditors will ruin your life.

There's only one good way to escape debt slavery, which is to buy your way out. If you earn a lot of money (or life cheaply enough), you can pay your debt down at an accelerated rate. This particular path makes a great story, because it's just an extreme version of the sort of "right living" that our culture supports.

The path is easy to describe, even if it's not so easy to do:

  1. Boost your income and cut your expenses, to generate a surplus.
     
  2. Make the minimum payments on all your debts (to do otherwise would be to rack up serious fees and penalties).
     
  3. Pick one debt to pay off first, and apply all your remaining surplus to that one debt.
     
  4. As each debt is paid off, roll the minimum payment for that debt into the surplus and repeat the process with the next debt. (This is called the "snowball method," for the way the surplus builds as each debt is paid off and its minimum payment can be rolled in.)

Better to avoid debt altogether, if you can.
 

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Guest's picture

Thank you for making the case for debt free living. In this day and age, common sense is not that common anymore. I like the idea of doing a "debt snowball", but I love not having any debt at all!

Guest's picture
Oscar C

Finally out of CC Debt (goo thing too my intro APR ended the same month) The only thing I'm using that card for in the next month is my pup's vaccine ,that i can pay before the billing period

Guest's picture
Long

I never really thought of debt as slavery until I read Dave Ramsey's book. If you think about how most people earn and spend their money, they are spending most of their time working and earning money for someone else.

I've been working on implementing the debt snowball recently and it is making a huge impact already. I can't wait to become debt free and actually being able to take home most of my earnings.

Guest's picture
Johann

Great advice, especially the 2nd path but I think you forgot to say a couple of things. Here are some things that I do, or at least hope to do.

1. minimize spending.
2. treat that plastic card as something to purchase important things; food, clothing (no designer apparels please) essential house repairs...
3. don't incur debt to pay other debts, that's just stupid.
4. our grandparents are right, money saved is money earned.

Guest's picture

Hey Phil,

You can't go to prison for not paying your debts in the United States. If you fail to file an answer to the court summons, the creditor will automatically win a default judgment against you..they will then reach out to your employer to garnish wages (depending on your state), and they can take up to 25% of your disposable income or 30x federal min wage, whichever is less. Of course this is on the federal level, but some states have their own specific rules.

I guess the only way you can really go to jail is if your intentions were to fraud the bank, but I don't think that was the context here.

Philip Brewer's picture

There are other ways for debt problems to get you thrown into jail.

The most common (and there have been a steady stream of news reports about this issue since the recession began to bite) is this:

  • The creditor, after getting a default judgement against you, sends you a stack of interrogatories asking about all your assets.
  • You, having moved or being busy working three jobs or clinically depressed—and in any case, not a lawyer—do not respond, or fail to respond in proper form.
  • The judge issues a bench warrant for your arrest for contempt of court.
  • The next time you interact with the police, you get hauled off to jail.

Of course, you're not getting thrown into jail for not paying your debts, you're getting thrown into jail for not being able to afford a lawyer to get all the paperwork right—but I'm sure it feels like getting thrown into jail for being late on your debt payments.