Introduction
Steve Rhode: Hey, you’re back with the Get Out of Debt Guy Show. I’m the old Get Out of Debt guy Steve Rhode, and with me is the new Get Out of Debt guy, Damon Day. Hey Damon.
Damon day: Hello Steve.
Steve Rhode: Today we’re going to talk about the 16 common myths about paying off debt. Now Damon hasn’t seen this list, and it will be quick. This is not even an exhaustive list. I could probably have come up with a hundred common myths because people have so many misconceptions about dealing with debt.
My biggest problem, Damon, is that the misconceptions and myths that people believe in make people feel depressed, sad, inadequate, and like failures. And once you understand reality, you will understand why people have those emotions, but they are just not based in reality. It’s not how life really works.
Myth No. 1: I’m a loser or a failure because I have too much debt
Steve Rhode: Common myth number one: I’m a loser or a failure because I have too much debt.
Damon day: You know, I look at that as social media. You’re not alone. Debt is much more common than you think. It’s part of the culture we have. Would it be better if you had no debt? Yes, that would be true, but the nice thing is that there is a way you can solve it.
Steve Rhode: One of the things I’ve learned is that I really avoid social media because it creates too much pressure and expectations. When you look at what your friends are doing and they’re all having a fantastic vacation, you don’t see their credit card bills. They can proudly be deeply in debt, but that is not the case. You are not a loser or a failure because you have too much debt. It just is what it is. We can do better as we move forward.
Myth #2: My credit will never recover
Steve Rhode: Common myth number two: My credit will never recover from my debt problems.
Damon day: Oh my god. Your credit will always be restored. Why? Because banks want to lend you money. That’s how they make money. Do you think they want you to be a leper, a pariah, “oh, we’re never going to lend you money again”?
When I filed for bankruptcy – what was that, 2011, 2012 – when I got my discharge papers in the mail that said, “Hey, Chapter Seven is done, these debts are wiped out,” in the mail that same day – and it sounds like I’m making it up, but I swear I’m not – I got my discharge papers from the court and in that mailbox it said the same day that Capital One said, “Hey, here’s our new Fresh Start Program card. Congratulations. Here’s a thousand dollars and no interest for a year. If you make your payments on time, we will increase your credit limit within six months.” I literally had a brand new credit card the same day I got a few hundred thousand dollars forgiven in bankruptcy court.
Myth #3: I need to pay off debt for good credit
Steve Rhode: Common myth number three: I need to pay off my debt so that my credit score will be good in the future.
Damon day: I mean, you can pay off your debt and your credit score will probably improve. But you also have to ask yourself: what is the value of that credit score? People get so fixated on that score itself. Sometimes it clouds their judgment about what they should be doing and what the priorities are.
Don’t make bad decisions because you’re worried about a credit score. That’s how they catch you. That’s why there’s a credit score in the first place. People think credit score means it’s a report of how smart you are in personal finance. It’s almost the exact opposite. Your credit score is not meant to be a report card on how you are doing. Ultimately, it’s designed as a numerical number so lenders can make quick decisions about your risk level.
Myth #4: Bankruptcy will ruin your life
Steve Rhode: Myth number four. Bankruptcy will ruin my financial life.
Damon day: No. Every client I’ve ever had and ever talked to has a feeling of bankruptcy that is usually not true. Usually they think, “Oh my God, I’m going to be a leper. I’m a pariah. My credit is going to be bad for the next ten years. I won’t be able to buy a car.” All those things are not true.
Steve Rhode: One mistake that drives me out of my mind is when people live on beans and rice and take the baby step. And they’re trying to get out of debt over the next five years and they’re in their 40s or early 50s. Instead of tackling the debt right away and doing better in the future. If you do the beans and rice, you’ll spend the next five years digging yourself out. You’re essentially throwing away more than a million dollars in retirement money that you could have had by dealing with your debt today, learning from it, and moving on and starting saving for retirement again. Because the one thing you can never recover by working harder or anything else is wasted time.
Myth #5: Debt advisors put my interests first
Steve Rhode: Myth number five: A credit counselor or debt settlement advisor puts my interests first.
Damon Day: No. They earn a commission. They are there to sell you something. Call five debt settlement companies – all five to a T and say, “Oh, debt settlement, our program is the best program.” Call five credit counseling agencies: “Oh, our program is the best program. Settlement is a scam, bankruptcy will ruin your life for 10 years.” Bankruptcy attorneys: “Oh, no, no, no. Settlement is a scam. Credit counseling is going to cost too much. The best way to do this is just file a Chapter Seven and wipe out this debt.” To the person, they will all tell you that the best thing to do happens to be what they want to sell there.
Myth #6: TV finance people know what’s best
Steve Rhode: Myth number six: Popular personal finance people on TV always tell me what’s best for me.
Damon Day: Rejected. TV personal finance folks say demographics and audience testing are hitting home so they can keep doing their show and selling ads. I’ve heard some of the biggest names say the most ridiculous things that have no mathematical meaning at all because that’s their pet peeve.
I listened to the radio. This gentleman had called. They had a few children and he was very distraught about the debts he had. The only asset he had was his house. There was equity in his house and the radio host basically told him his only option was to sell his house. The man was devastated by this news. He told the host that “this house is our whole world. The children were born here.” And the host said, “Well, you have to man the house and sell it.” I listen to the man’s situation and I think: no. There are other strategies he can use to resolve this debt.
Additional myths addressed
The episode goes on to cover:
- Myth #7: My friend’s debt solution should work for me too
- Myth #8: Pay off all debt before saving for emergencies
- Myth #9: Going to college is always a smart financial move
- Myth #10: Credit cards are bad
- Myth #11: Always choose the credit card with the lowest interest rate
- Myth #12: A personal loan is better than falling behind
- Myth #13: I can only afford minimum payments so I never get ahead
- Myth #14: I can’t save for retirement while paying off my debts
- Myth #15: Not sure about taxes on forgiven debt
About payday loans
Damon day: If you are looking for personal loans, a personal loan is never a good idea. Before you get a personal loan: it’s just that pitfall, because how are you going to make up for that? Once you’re in there, it’s like you can never catch up and get out. You’re much better off calling your bank, your car lender, whatever. Many banks are now asking for payment deferrals, especially with COVID. Many banks will give it to you, even for a month.
About taxes and forgiven debts
Steve Rhode: Myth number 16. Do I really owe taxes on my debt if it is forgiven?
Damon day: If you have debts discharged in bankruptcy, absolutely not. You do not owe any tax on this. If you forgive debts through a settlement, you may owe taxes on them, depending on your situation.
Steve Rhode: If you are insolvent, if your debts exceed your assets and your debts have been forgiven, you do not have to pay taxes on them. You must file the form with the 1040 when you receive the 1099. You must file IRS Form 982 to request the relief.
Wrapping up
Steve Rhode: If anyone heard what we said and wants to know more, how can they get a hold of you, Damon?
Damon day: Damonday.com or you can Google me. My name is not that common, so you can also find me on Google.
Steve Rhode: If you haven’t already subscribed to the podcast and liked everything you heard, please subscribe and I’ll see you next time, Damon.
Damon day: Goodbye.
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