Why would an otherwise rational and intelligent person chew through their retirement account to keep the mortgage paid on an upside-down house. Or borrow against their home to pay off credit cards even when they know they can’t realistically afford the payments?
The two reasons I’m most often told:
I don’t want to hurt my credit score and/or
I don’t want others to think badly of me
Both of the reasons speak to the same underlying and fundamental question: “Who are you?”
Do you think the only reason you are someone is because you live in a nice house, drive a shiny car, or have an 825 FICO score?
Having an identity that is tied to my stuff, my job, my diploma, my looks, my accomplishments (or worse my kid’s accomplishments) or anything else that has my in front of it, is building our life on a foundation of sand, right at the edge of the beach, near warm hurricane-prone waters.
It might not happen today or this week or even in the next five years, but a big storm will come and it will knock the snot out of you. If you are lucky, that tumble will force you to re-assess who you are.
If there is anything sadder and more limiting than defining yourself by your stuff or your achievements, it’s dying having never known another way.
Let’s make sure we don’t have a misunderstanding here. I think it is vitally important that you meet your obligations. You should pay your debts in full and on time. That’s what you promised to do when you signed that loan agreement and it’s important to me and I know it’s important to you that you keep your promises – right up until you can’t. When you can’t, you must find the courage to realistically and rationally evaluate the situation.
If you are borrowing from one credit card to pay another or have taken out a 401K loan or cashed out retirement savings to pay your mortgage, you (at least temporarily) can’t pay your debts.
There are people who break their promises easily; they can without a moment’s hesitation suggest strategic defaults or debt settlements when the sky darkens. But I don’t know these people.
The people I know see the clouds but insist they can handle the storm. When an illness or a job loss wreaks havoc on their ability to meet their obligations, these Pollyannas trudge on using new debt to pay their old debt, insisting things will be better soon – but they are too scared to sit down and define exactly when soon is or how things will get better. Unfortunately, for some percentage of these good people, the better will not be big enough or fast enough to avoid lasting and sometimes permanent damage.
Often it’s the fear of losing our identity that keeps us from facing our problems head-on; it makes us irrational and just plain stupid. If you puff out your chest and tell me your credit score while ignoring the fact that your net worth is negative, it’s likely you have tied some part of your identity to that number.
Instead of, “I’m Barbara and I have near perfect FICO score” try on “I’m Barbara, beloved daughter of Christ and heir to his throne” and see if that fear doesn’t fade.