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Key Takeaways
- Banks charge 25-31% interest because they've built non-payment risk into their business model—your inability to pay isn't a moral failing, it's expected.
- Five years of 'beans and rice' debt repayment can cost you over a million dollars in lost retirement savings due to missed compound growth.
- Bankruptcy is written into the U.S. Constitution and appears in the Bible (debt forgiveness every 7 years)—it's not a modern loophole.
- Federal Reserve research shows people who discharge their debts do better financially than those who struggle to pay everything back.
- After Steve's bankruptcy, every creditor told him to stop sending payments—they had no mechanism to accept money for forgiven debt.
- Late payments aren't reported to credit bureaus until 30 days past due—you have time to make informed decisions without panic.
- The question isn't 'should I pay my creditors'—it's 'do I have a higher moral obligation to Citibank or to my children's future?'
Full Transcript
Click to expand transcript
Introduction: Morality and Money
Steve Rhode: Hey, it’s Steve, the original Get Out of Debt Guy, and today we’re going to talk about something that gets real uncomfortable real fast—morality and money.
As always I’m joined by the new Get Out of Debt Guy, Damon Day. Say hello, Damon.
Every weekday I read the enforcement actions, filings and fine print the outlets skip, and turn them into the one or two moves that actually improve your position — a rate worth moving for, a fee you can refuse, a deadline to beat before it costs you.
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I write Your Money Actually most weekdays — actionable money information you will not find anywhere else, and the small decisions that compound. It is free, I sell nothing, and I take no money from any company I write about.
Damon Day: Hello, Damon.
Steve Rhode: Now I know that sounds like the start of a lecture, but this isn’t Sunday school and I’m not here to scold anyone. What we’re going to do is have an honest conversation—me and Damon—about the moral weight people carry when they’re drowning in debt.
Because here’s the truth nobody tells you: Doing the right thing financially isn’t always as simple as just paying your bills.
Is it more moral to leave yourself at a dangerous financial position to try and please others? Even if it absolutely wrecks your future finances, your retirement years when you can least afford it?
Or is it more moral to protect your stability, your family, and your sanity? Even if that means walking away from a debt you simply cannot afford to pay.
These questions don’t come with clean answers, but that’s exactly why we need to talk about them because shame and confusion love silence. And I think that it’s time we broke that.
The Moral Conflict of Debt
Damon Day: People are so—you know, they’re—I can’t think of the right word. It’s not conflicted. It might be misinformed when it comes to this particular topic because you hear people who say all the time like, you have a promise to repay your creditors. But don’t you also have a promise to take care of yourself and your family and keep them safe?
Steve Rhode: Yeah, well, you and I have talked about this topic a million times over the last 20 years and it comes up a lot with my clients. It’s probably in the top five of—it’s not so much questions as statements hoping for an answer.
Damon Day: This whole idea of not making a payment to a creditor and wrestling with that morally—we’re not here to say what’s right and what’s wrong. We’re just having a discussion about it. There’s a lot of different angles to it and we’re certainly not saying “oh, don’t worry about it, just don’t pay your creditors, not a big deal.” But it is, like Steve said, a lot deeper than a black and white issue.
The Struggle of Living Month to Month
Steve Rhode: I’ve seen people over the years, over the decades, who have listened to advice—whether it’s from their church or friends or personal finance gurus or whatever—and they just limp along living month to month, cutting everything out and trying to survive. And then the engine goes in the car or the tire blows or something like that and it sets them back months or years. Just leaves them lingering in a terrible situation. I’m not sure how that is more virtuous than taking responsibility and moving forward.
The Creditor’s Rules
Damon Day: Everybody is in a different circumstance, different situation. But I’ll have situations where a client is wondering about settling their debt, and they’re really conflicted with this idea that if you want to negotiate with your creditor, you have to be behind—you cannot continue to make the payments. That’s a creditor rule.
If you’re in a situation and you’re paying back Citibank and you call them up and tell them all these horrible things that happened—your leg fell off, you got leprosy, you can’t go to work, you can’t make a mortgage payment—and wondering if they’ll settle with you, they will say no. Because you’re making your $500 a month payment.
Borrowing from Family vs. Banks
Damon Day: Let’s use Citibank as the example. It is an obligation—signed a contract, you would pay it back. I understand all of that. But it is different than if you went to your brother and borrowed a thousand dollars.
Here’s why it’s different: If you fall on hard times or you start to struggle financially and you go to your brother and have a conversation, in most cases your brother is going to treat you differently—renegotiating the terms, letting you slide for a few months. Versus Citibank—when you call Citibank and tell them about your leprosy problem, they are going to say “too bad, so sad, payment’s due on Friday.”
Steve Rhode: Think about the cardholder agreement that you agree to when you took out the credit card or loan. Life is not absolute—we don’t know what’s going to happen tomorrow. And yet the cardholder agreement says come hell or high water, every month you need to make this payment. There’s no allowance for unforeseen events.
Damon Day: There’s a reason why they’re charging 25%, 29%, 31%. It’s to cover the losses. There’s risk built in—they know a certain amount of people aren’t going to be able to pay that back in full.
The Manipulation Game
Steve Rhode: For a lot of clients it comes down to this: this whole thing is essentially a game, and the creditors are playing by a different set of rules than most of their customers are. And it’s to their benefit to manipulate you by making you feel that you’re a loser because you can’t pay.
The Five-Year Opportunity Cost
Steve Rhode: Let’s use the five-year window. Somebody says “I listen to this person, I have an obligation, it’s more moral to repay my debt. I made a promise, I need to repay it.” And so they do the whole living on beans and rice for the next five years, just limping month to month.
They’re not just repaying their debt—they are throwing away, you know, a million dollars plus in retirement savings that they couldn’t start saving now.
So is it more moral to repay your creditors, or is it more moral to put yourself, when you can least afford it, in the worst situation that you can? Those are things you have to struggle with and think about.
Bankruptcy in the Constitution and the Bible
Damon Day: Bankruptcy is—you have a legal right to file bankruptcy and have your debts forgiven. Not just a legal right—bankruptcy is actually written into the US Constitution.
Steve Rhode: Because it was recognized that people need a fresh start sometimes. I think that’s one of the reasons why America has become so prosperous over the last 100-some-odd years—because that bankruptcy option in the Constitution gives entrepreneurs, dreamers, a chance to say “I’m going to take a big swing.” And if I totally miss, I get a fresh start.
Damon Day: Bankruptcy wasn’t invented in America. Bankruptcy was already well established in England before those immigrants came to America and brought it with them.
Steve Rhode: It was recognized even way back then, before America even existed, that unless you give people a fresh start, a second chance, things will just grind to a halt eventually. I mean, it’s even in the Bible, for crying out loud.
Damon Day: Every seven years forgive debts.
Steve Rhode: And that’s why you can file bankruptcy after seven years.
Churches File Bankruptcy Too
Steve Rhode: What even blows my mind is that when people talk about the morality of bankruptcy or being unable to pay your debts—then why is it that so many churches file bankruptcy every year? Because they do.
Damon Day: No Steve, they don’t file bankruptcy. They strategically deleverage.
Steve Rhode: That’s right. They’re utilizing the protections of the law to give themselves an opportunity to move forward and do good things.
Strategic Default Explained
Damon Day: When it comes to a settlement strategy where we’re going to strategically default in order to get in a position where we can negotiate—clients wrestle with that whole idea of not sending that payment. But if they were filing bankruptcy, they would be fine with it.
The bankruptcy is not what frees up your cash flow and allows you to not pay your creditors. You can stop making payments on debts and not file bankruptcy for a year or two years. The bankruptcy just absolves you of the debt, the same way a settlement does.
We didn’t invent the game—the banks invented the game. I need the bank to listen. The bank won’t listen to me when I’m making payments. How can I get the bank to listen to me? I don’t pay them for a couple of months—all of a sudden I got the bank’s attention. That’s all a strategic default is—just to get the bank to listen to you.
Steve’s Bankruptcy Story
Steve Rhode: That was a big lesson for me because after my bankruptcy in the late 80s, I felt the same way and I wanted to repay my creditors even though the debt was forgiven. And so I continued to send payments, and every single one of them said the same thing to me: “Please don’t send payments.” Because they had no mechanism or place or way to account for taking money for debt that had been legally forgiven.
Damon Day: So now we’ve come kind of full circle—remember the difference between borrowing from your brother and borrowing from a bank. Your brother would say “oh, thank you, you’re doing much better, I appreciate it.” The bank says “we already forgot about this, stop it. We broke up a long time ago. Stop reminding us of this relationship. Do not send us any money.”
From a moral standpoint, that should tell you where the bank stands. And then you’re sitting there worried about it, stressing about it—the bank’s not even thinking about you at that point. So why should you be stressing about not paying them back if they’re not worried about you not paying them back?
Fear of Ruined Credit
Steve Rhode: One of the reasons people make poor financial decisions to repay debt they can’t afford and sacrifice their future is because they’re afraid of what their financial future is going to look like. “My credit’s going to be ruined, I’ll never get a house, I’ll never be able to buy a car, I’ll never get a credit card, I have to live using the riskier debit card strategy.” All of those are common thoughts and they’re all wrong. Wrong, wrong.
Damon Day: You know what a bank would rather have you do rather than send them checks for money that’s been legally absolved? They would much rather you apply for a new card. Instead of sending them money for an old balance, they’d much rather you get a new credit card from them and start charging it back up so you can start paying them interest again. That they understand and appreciate.
American Express Exception
Steve Rhode: If you settle a debt with the bank or you go bankrupt—short of American Express—you go bankrupt on American Express, don’t try to get another American Express card. But the good news is there’s plenty of other cards out there.
I always think of them as the elephant of the credit card industry because they never forget. Over these years they will send me an application and if I apply they will reject it. Because Steve’s got perfect credit, but he went bankrupt 30 years ago.
Damon Day: So Steve, this is playing into the fear that people have—if I go bankrupt my life is gonna be ruined forever. So tell us how horrible your life is without an American Express card.
Steve Rhode: Not at all. I don’t even know what I would do with an American Express card because I have a credit card in my wallet that gets me into the airport lounges. I don’t need an American Express card. I have a credit card where I can get advanced tickets to concerts and discounts at restaurants and everything else. American Express makes no difference to me at all.
The Federal Reserve Study
Steve Rhode: This is not an opinion. The Federal Reserve did a study about people who settle or discharge their debt and their financial health moving forward. And they found that people who settle or discharge their debt do better financially from that point forward than people who don’t. You can find this article on my website GetOutOfDebt.org—search for “Federal Reserve” and “bankruptcy” and read the results for yourself.
Five Years Later
Steve Rhode: If you chart a course over five years, you’re going to be financially and credit-wise better off five years from now if you go bankrupt or settle the debt that you can’t afford right now. Get it off your table and then start doing better moving forward—both from an income standpoint and lower expenses and rebuilding your credit.
In almost every case, you will be better off five years from now by going bankrupt or settling the debt than you would be if you spent those five years on beans and rice struggling to pay off every dollar. And again, I’m not saying that’s the wrong strategy—it might be the right strategy for you. But don’t go into it thinking “well, that’s the only way I’m still going to have credit intact and be okay.”
Five years later, people that go bankrupt are in a much stronger position to buy a home, buy a car. Why? Because their credit has recovered from the bankruptcy or settlement, but more importantly, they’ve been debt free for three to five years and have been able to save money.
The Consultant’s Value
Damon Day: What’s the definition of a consultant, Steve?
Steve Rhode: Somebody who borrows your watch and tells you what time it is.
Damon Day: Exactly. And then when they tell you, you go “aha, yeah, that sounds awesome! I never thought of that.” But a lot of it is just giving you permission to be able to do it, or letting you know this will work. It’s one thing to have an idea. It’s another thing to talk to somebody that has 25 years of experience with that idea that can walk you through the process.
When you jump off this cliff, don’t worry, you’ve got a parachute. I packed it. I know it’s going to open. You’ll be fine. Versus “I think I can jump off this cliff, I’m not going to ask anybody, I’m just going to go for it.” There’s a difference.
The Client Who Waited 10 Years
Damon Day: How many times have I used that story about the client that reached out to me 10 years ago, originally reached out, wasn’t ready to make that decision, and continued to do it the old-fashioned way? And reached out 10 years later—the only difference was she owed an additional $100,000. It went from like $200,000 to $300,000 plus. She carried that debt for a decade because she didn’t like the idea.
She couldn’t go bankrupt, but she didn’t like the idea of strategically falling behind. Because at the time she technically had the cash flow to just barely bail the boat enough to keep it halfway sunk. And she bailed that boat for 10 years. And then 10 years later when she reached back out, it was just a little bit lower in the water.
Steve Rhode: And her creditors didn’t say “thank you for the last 10 years of struggling.” They said “where’s your payment this month.”
Damon Day: It was hundreds of thousands of dollars that she spent for 10 years, not wanting to strategically default. And when she called me back, I went back to my old notes—we did the exact same strategy I had suggested 10 years previous. She wasn’t ready at that time, and that’s fine. And we had her debt free in 18 months from that point.
Don’t Rush—But Don’t Wait Either
Steve Rhode: Here’s what I always like people to do: Let’s have an honest conversation. Let’s get the facts. Let’s talk it through. And then I don’t want you to do anything today. I don’t want you to make a knee-jerk reaction. I want you to let it percolate for a few days and then let’s talk again. Think it through instead of just having an emotional reaction.
Damon Day: You’ve got time. There’s no gun to your head requiring you to make a decision about this today. The problem is you call these debt relief companies—I don’t care if it’s a bankruptcy attorney, debt settlement company, credit counseling company—everybody wants you to make a decision. They have one phone call with you—make a decision, make a decision, make a decision. Because they’re focused more on making a sale than trying to help you understand all your options.
Late Payments and Credit
Steve Rhode: As you said recently on a recent podcast—if you’re late on a payment during this time where you’re trying to decide what to do, if you miss a payment, it doesn’t hurt your credit. You’ve got to be 30 days or more late.
Damon Day: I’m actually surprised how many people don’t realize that. It’s kind of an epiphany for a lot of people. If your payment’s due tomorrow, I don’t know what to do—well, if you’re on the fence and you’re trying to decide between paying your Chase card or paying your mortgage, probably pay your mortgage, let Chase go. “But I don’t want it to ding my credit.” It’s not gonna ding your credit if the payment’s due tomorrow and you don’t pay it. They don’t report one day late on your credit report. They report 30 days late.
You actually have an entire month before it’s even in danger of getting reported on your credit. You can be two weeks late and things work out the way you want—you decide “okay, I’m gonna pay it back,” you send in a payment. The only downside is you probably have a $35 late fee, which you can probably call and get waived if you’ve never been late before. So it’s no harm, no foul. Worst case scenario, it’s gonna cost you 30 bucks. But I would rather spend the $30 as an insurance premium to give myself the time I need to make sure I’m making the right decision.
Final Thoughts
Damon Day: The morality of it—it’s so different for everybody. But Steve said it really well at the beginning: Don’t make a snap decision. Take some time and think about it. It’s not all black and white. Don’t feel like repaying the creditor has got to be the number one thing above everything else. That’s the wrong way to approach it. Yes, this is an obligation that needs to be heavily considered. But here are these other things that also need to be heavily considered at the same time.
Steve Rhode: I had a client once who said “I absolutely want to avoid bankruptcy. I don’t want to settle my debt.” And his housing cost was way too high. So I said, “All right, well, let’s get you and your family to move to the worst neighborhood around because it’s going to be the cheapest.” “Why would I do that? That’s not sensible.” All right—so all of a sudden bankruptcy wasn’t looking too bad.
It’s all relative.
Damon Day: It’s all relative.
Steve Rhode: All right Damon, so until next time, I will see you.
Damon Day: Peace.
Frequently Asked Questions
Is it immoral to not pay back debt?
Morality around debt is complex. While you have an obligation to creditors, you also have obligations to protect your family's financial future. Banks build non-payment risk into their interest rates—it's part of their business model, not a moral failing on your part.
What is the opportunity cost of paying off debt slowly?
Spending 5 years paying minimum payments at 25%+ interest can cost you over a million dollars in lost retirement savings due to compound growth you miss during those years. The 'moral' choice to struggle may actually hurt your long-term financial security.
Is bankruptcy in the Bible?
Yes, the concept of debt forgiveness appears in the Bible, which mandates forgiving debts every seven years. This is why bankruptcy law allows you to file again after seven years—it's rooted in ancient recognition that people need fresh starts.
Will my life be ruined if I file bankruptcy?
No. Federal Reserve research shows people who discharge their debts do better financially than those who don't. Steve Rhode got an FHA mortgage within three years of bankruptcy and has excellent credit today, 30+ years later.
How long before a late payment affects my credit?
Payments aren't reported to credit bureaus until they're 30 days late. You have about 45-60 days to resolve a missed payment before it shows up on your credit report.
Who hosts The Get Out of Debt Guy Show?
The show is hosted by Steve Rhode, who went bankrupt in 1990 and founded Debt Counselors of America in 1994. He's joined by Damon Day, a debt strategy consultant at DamonDay.com.
