MBNA or IRA? Financial Choices & Personal Responsibility

As a consumer bankruptcy lawyer, I routinely meet with families with substantial credit card debt who are considering getting a fresh start through bankruptcy. They find the thought of bankruptcy painful; they have usually worked very hard to make the minimum payments and feel responsible for repaying the debt. “It’s my debt and I want to repay it,” is a frequent refrain.

My retort is: how much do you have saved for retirement? All too often, the answer is “Nothing”. I think the conclusion from that question and answer is obvious, and becomes more so to the extent the debt is large and/or the couple is middle aged or more. Striving to repay debt on credit card terms is frequently impossible, and if not impossible, it is a fool hardy choice.

Let’s do the math: assume that the credit card debt is $20,000, the interest rate is 18%, and the minimum payment is 2.5%. Paying the minimum payment and adding nothing to the balance in the way of new purchases or penalty fees, it will take 37.5 years to pay the balance down to zero. Interest over the life of the repayment period would be nearly $30,000 . What you have at the end of 37 years is a paid off debt.

If , instead, you made the same payments required to pay off that credit card (approximately $50,000) into retirement savings at 6% for 37 years, you would have $315,874 in cash to fund retirement.

So which would you rather have after 37 years of paying: nothing or $315,874?
I honor the instincts of the client who wants to repay their debts; I simply challenge the wisdom and feasibility of doing so. Not all of my clients have 37 more years of working life. Few of them can expect a life free of job loss, ill health, divorce, or other bumps in their financial lives that may interrupt their ability to make the payment every month.

I suggest that perhaps taking “personal responsibility” means saving to be financially self sustaining at the end of one’s working life. I see the choice as IRA or MBNA.

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