How I Left My Debt: Bouncing Back From Bankruptcy
In this series, NerdWallet interviews people who have triumphed over debt. Answers have been edited for length and clarity.
Rashad Muhammad, a school principal and part-time real estate agent, began taking on debt while attending Bethune-Cookman University in Daytona, Florida. It was there that he met his wife, Nirvanna, who was having her own financial difficulties.
Although he had a football scholarship, injuries led Muhammad to take out student loans in his freshman year. After graduating, he took out further loans to pursue a master’s degree in educational administration.
The couple merged their finances after getting married in 2005, combining their student loans, credit card debt, and car loans, then moved to Texas in 2007.
As their families began to grow, their debt also increased, at one point reaching $ 250,000. Their debt weighed heavily on Muhammad, especially when Nirvanna temporarily stopped working as a teacher in 2011 to have their second child.
Desperate, the couple decided to ask Chapter 7 Bankruptcy in 2011. [Editor’s note: In some cases, bankruptcy is the best option for handling overwhelming debt. If your non-mortgage debt is more than 40% of your income or would take more than five years to pay off, consult with a bankruptcy attorney.]
The process eliminated their unsecured credit card debt, but it didn’t significantly change their finances – or their spending habits – overnight. They still had student loans. They also took out new auto loans to replace cars they lost in bankruptcy. In the middle of having their third child in 2012, they racked up more credit card debt. In the spring of 2013, they owed $ 179,000.
For nearly four years, the couple took action and made sacrifices to pay for everything. In January 2017, they were officially debt free.
Today, they live comfortably in Fort Worth, Texas with their three children, ages 7, 9 and 13, and can afford vacations and save for retirement.
Muhammad spoke to NerdWallet about recovering from bankruptcy, what he learned about dealing with debt as a couple, and the financial goals they now prioritize.
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What was your total debt before you declared bankruptcy? What about today ?
Before bankruptcy it was around $ 250,000. We had $ 30,000 on one car, $ 25,000 on another car, $ 125,000 in student loans and $ 70,000 in credit card debt. After bankruptcy, we racked up more credit card debt and had to get new auto loans. In March 2013, we had a debt of $ 179,000. Today we have no more debt except for the remainder of our 15-year mortgage.
How did you end up in debt at the outset?
I went to college on a football scholarship and didn’t know anything about finance at the time. I didn’t know anything about saving and had lived on paychecks all my life, which I thought was normal. My wife also had student loans and credit card debt.
As a soccer player, I was not allowed to have a part-time job because it was considered illegal to work while playing soccer. After injuring myself in my first year, I started taking out student loans. I also got a masters degree after I graduated, so I increased my student loan debt to $ 59,000.
What made you decide to declare bankruptcy and how did the procedure go?
My wife had to give up a few months of work when we had our daughter in 2011, and the debt was overwhelming. When that second baby arrived, we were making decent money, but all the money was going to our debt. We felt like we were drowning and we had no way out. We had thought of doing it [declaring bankruptcy] for a year, but it was so taboo.
We had to go see a bankruptcy lawyer, who filed a petition, and then we had a day in court. It was a day that I will never forget. Our son was in kindergarten at the time and our daughter was still a baby. We had to tell the judge our total debt out loud and I remember hearing someone laughing in the background. It was revealing and humiliating.
How Has Bankruptcy Affected Your Finances?
We lost our house and our cars. We thought it might be a relief to move forward, but it didn’t solve all of our problems. We still have to bounce back and recover. While bankruptcy wiped out our unsecured debt, we still had $ 125,000 in student loans and had to buy two more cars – $ 22,000 in auto loans – since we don’t work next to each other. . We also had a third child in 2012 and ended up getting our credit card back up to $ 32,000.
What steps have you taken to pay off the rest of your debt?
When we only had one income, we cashed in part of my wife’s pension to help pay off student loans. [Editor’s note: While it’s tempting to halt retirement savings or pull retirement funds out to speed your debt payoff, NerdWallet recommends against it. Amassing enough for retirement depends heavily on interest and returns compounding over many years.]
We used the debt snowball method. None of our interest rates were astronomical, so we canceled the small loans first. Watching two or three loans disappear quickly was powerful. We also completed the University of Financial Peace [Dave Ramsey’s nine-lesson class] in 2014. All tax returns were used to repay debt.
We cut back on our vacation – only going to Atlanta and Florida to see family – and stopped eating so much in restaurants. We also drove older cars. For example, we had a 2003 Honda Pilot, which we kept for eight years. We didn’t care what people thought of what we were driving.
What motivated you on your debt repayment journey?
We knew we wanted to be debt free, but the “why” was the real motivation. Examining the end goal – to start saving for retirement – has helped a lot. I couldn’t really dig to pay off my debts and saving for retirement at the same time, and it gnawed at me knowing that I was missing out on compound interest opportunities. We knew we would be able to save more when we got rid of our debt.
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What have you learned about managing debt as a couple?
My wife is the free spirit and I am the nerd; I love spreadsheets and she hates them. We had to understand each other’s strengths and weaknesses.
I was going to my wife and I was like, “Hey babe, we’re $ 22,000 in debt, so let’s see how we can get her down to $ 18,000!” I learned that as the numbers went down, the more reluctant spouse started to join us.
Other than that, it was so important for us to combine finances and make sure we both had our say. I’ve always earned 60-70% of our income, but it’s our money.
We will teach our children to only buy things that they have money to buy. For their birthdays, we put money in their college funds. We recently took a cruise and our kids were blown away. They’ll remember the cruise when they’re older, but they won’t remember a $ 15 toy. Experiences, not things, make us happy.
Why did you decide to buy a house during your debt repayment period?
When we lost our house to bankruptcy, we knew we wanted to get another one, but we wanted to do it the right way. It meant finding a home we could afford and getting a loan that met our needs. We bought our house in May 2015 and suspended our debt repayments – paying only the minimum – during that time [between October 2014 and May 2015]. We went through Neighborhood Assistance Corporation of America [a homeowner assistance program], which did not require a down payment and had low interest rates. We went with a 15 year mortgage.
We didn’t wait until we were free from our debts to buy a house. If we had, we would have bought at the top of the market and probably paid 20% more for the same house. We have a little over 10 years to pay it off, but there is no rush because the interest rate is low.
What would you have done differently?
I would have gone to community college and worked for two years while staying at home. If I could talk to myself at 18, I wouldn’t have applied for that first credit card without knowing anything about money – it put me on the path to debt, and the most important to building wealth is staying out of debt. I remember buying a set of cell phones for $ 49 that didn’t even work.
What’s your income and what are your financial goals now that you and your wife are debt free?
My wife and I are both educators and we have achieved a 3% raise almost every year. Our joint salary is around $ 161,000 now. I also earned around $ 20,000 from real estate last year.
My goal is to earn $ 50,000 with real estate this year and eventually $ 100,000 per year. This money goes to retirement, my children’s 529 plans, taxes and fun.
We want to retire at 52 and 54 respectively. We wait until we receive our pensions. I was motivated by FIRE [“financial independence, retire early”] movement.
We are also going to Cabo for our 15th anniversary and have booked another cruise for the whole family for 2021. We were unable to do these trips before.
What is the unexpected benefit of being debt free?
We were having dinner one day and saw a single mother eating with four children. My wife and I looked at each other and it clicked – we told the waiter we would cover his bill and tip. In the past, when we had debt, we felt guilty for doing something like this. How could we help people when we could barely help ourselves? Doing random acts of kindness wasn’t possible before, but it’s so good to be able to do it now.
How to get rid of your own debt
If the history of the Mahomets motivates you to tackle your own debt, here are some things to consider.
Weigh the pros and cons of bankruptcy. Deposit for bankruptcy is definitely not for everyone, but it can be a smart option if your debt amount (excluding mortgage) exceeds 40% of your income, among other factors.
Decide which debt repayment method is right for you. The Mohammedans used the debt snowball method, which prioritizes small loans, but the avalanche of debt The method first targets the debts with the highest interest rates.
Get out of the comparison trap. Driving an old car (instead of buying a brand new one) helped the Mahomets save money over time, but they had to change their thinking. “We are in a culture where we glorify others. We see things and think they’re worth it, ”he says.
Photos courtesy of Rashad Muhammad.