When Paying Off Debt Doesn’t Pay

Financial advisors like Dave Ramsey often tout the importance of paying off your debt. People write entire books about paying off debt. Strangers on the internet describe their snowball method and share when they have paid off something substantial, and everyone applauds.

While I think it’s great if people want to pay off their debt, I often wonder if it’s the best financial move for them. There are many instances in which I would advise against paying off debt. All advice below applies to the US and laws regarding debts there. Your reality may vary if you live outside of the United States.

Unsecured debts

I think when people talk of paying off debt, most people think of unsecured debts. These are debts that don’t come with any collateral to the creditor. Things like credit cards are a perfect example of everyday unsecured debt. A mortgage or auto loan are both secured debts because if you don’t pay them as agreed, someone snatches the collateral away from you.

Paying off unsecured debts isn’t always something I’d recommend. Unless you have a very high credit card balance, if you were to leave unsecured debts alone and never make a payment on them, there is basically nothing the creditor can do to you. The only consequence you suffer is a lower FICO score.

Debtors’ prison

Throughout history until the late 19th century, debtors’ prisons were common. This was a jail for people who owed money. Since credit cards didn’t exist, someone typically had to ask a bank or private citizen for a loan.

If they didn’t pay as agreed, they would be thrown into debtors’ prison to work off whatever they owed. These weren’t just used for what we might consider the destitute today. Some signers of the Declaration of Independence spent time in prison for unpaid debts.

Today the closest thing we have to a debtors’ prison is the incarceration of people who cannot pay court fees or child support. Their work in the prison is applied to their owed amounts to the court.

Nowadays people are taken to court if they have a large outstanding debt that they are not paying as agreed. If this is something you’re being threatened with, talk to a bankruptcy lawyer to find out what your best option is. I believe in most cases, people being threatened with a lawsuit don’t have the money to pay off the debt, and in those cases, bankruptcy might be their…