I Can See Clearly Now – Pay Down Debt

Scott’s latest business has continued to increase its revenue each year, which allowed us to increase our monthly payments to IRS, first to $1,300, then to $1,800, and eventually to $2,200. I also received a mind blowing $50,000 bonus ($38,000 after taxes) in December of 2018, and a promise of $25,000 bonuses for 2019 and 2020 (our company was growing and I think it was a way to ensure I would stick around for at least 2 more years). We used the vast majority of the 2018 & 2019 bonuses to rapidly pay down debt.

By the beginning of this year, we thought we would finally be out of debt in October, when our 2009 debt expired and we had made the final payment on our 2010 debt (we were a little worried that they might try to tap into my 401k right at the tail end, to avoid losing money on the last year. We had no idea if they could do it without us agreeing to it, but if they could, we weren’t going to be able to stop them). But in July we received a letter, dated May 10^th, that told us we had 10 days to contact them to discuss our installment agreement (they reassess every 2 years), or it would lapse. Uh, okay…

I called them, and explained we had just gotten the letter. She told me it was automatically generated in May, but due to Covid19, it hadn’t been sent until July, and because of that, the agreement had already expired. Fucking great. Here we go again.

I asked her what was next. She said we needed to redo the assessment and they would give us a new payment amount. While I was on the phone with her, I asked her for our CSED (collection statute expiration date) for 2009 & 2010, just to be 100% sure we weren’t about to stop paying in October only to find out that the date had moved.

Everything I had read had told us that the date should have been October. We had not filed bankruptcy and we had not entered into an offer in compromise (an offer to pay less than what you owe because you are worth so much less than you owe and they have no hope to ever collect more than that), both of which can extend your CSED (it essentially pauses your collection time while it’s being worked out), neither of which we ever did. I had never read anything about installment agreements pausing the collection time, but apparently, they do. Up to a month each time you enter one. She informed me our expiration dates were now February of 2021 for the 2009 taxes and December of 2021 for the 2010 taxes (she actually said 2022, but I cannot understand how it possibly could have been pushed out an additional 14 months, so I am assuming she just misspoke).

Fuuuuuck. We weren’t going to be done in October. Which meant there was no way we weren’t paying off the last year in full.

We had started making plans to build a new house in 2021, after saving up some money after paying IRS off (in addition to my upcoming bonus). But having to pay the last year in full was going to take a big chunk of the money we currently had saved as well as the money we would be saving after October. And it was too big a chunk for us to have enough for a down payment on a new house. It was just too tight. We were disheartened to say the least.

But after a week of feeling sorry for ourselves, and beating ourselves up for getting ourselves into the situation in the first place, so many years ago, we accepted that it is what it is (Scott is particularly hard on himself during these moments. He feels that the entire thing is his fault. I feel that I spent plenty of money, didn’t make saving a priority, and never bothered to educate myself on what we were doing and how stupid we were being, so I deserve just as much blame). We also took a look at all of the money we had saved in different places ($5,000 in cash at our house, a few hundred on Paypal from selling some stuff we didn’t want or need, several thousand in Scott’s business he hadn’t taken as income yet, a few grand in another business account for a business Scott was planning on starting that got side lined due to Covid19, and a few more in the bank). Scott’s grandmother had also passed away recently and left him a chunk of money. All together, it was enough to pay them off.

So, at the end of July, when our assessment was due, instead of filling out the paperwork, we paid off our debt. Finally. After more than a decade. We’re done. It feels like an enormous weight has been lifted off of us. Sometimes, you don’t realize just how stressful a situation is until you aren’t in it anymore. To celebrate, we got take out for the first time in nearly 5 months.

Our finances have been all over the map for the past decade, but overall, at least one of us almost always had a better than average income. It’s felt odd to be in a situation where our earnings placed us firmly in the middle class (and the higher end of it at that), and yet, our debt payments were so much of our income, we were also broke at the same time. I once referred to us as rich-poor. And while it feels odd, it’s not an uncommon situation. As of 2012 (the most recent info I can find), an estimated 55% of Americans live at or beyond their means. Some of these people have low incomes, but there are plenty of other people who have good incomes that are still financed up to their eyeballs (we personally know plenty).

No longer being in debt (aside from our mortgage), we know for sure we have really changed. We now have $2,700 a month in income that is not earmarked for anything (that’s over 40% of our take home income and when we add my 401k contribution in, it’s over 45%). Neither of us has changed our spending habits (because of the pandemic, we’re actually spending even less than usual), neither of us wants to go buy a car, expensive toys, new furniture, or to spend tons of money on lots of cheap crap. Our used phones still work fine, the 15 year old TV in the bedroom is more than adequate, my 12 year old Hackintosh laptop is more than I need to write, and the 11 and 12 year old cars in the driveway are (knock-on-wood) still reliable.

Our financial goals have been on hold for more than a decade, so we have a lot of ground to make up. Our priorities now are to continue building our emergency fund, save up the downpayment on our next house (which we are building to be highly energy efficient and with the plan to age in place), and build our retirement funds up, with the goal to be able to retire by 60, should we choose to. So, we started doing a lot of investigating.

After making our final payment to IRS, we started talking about how far we had come and how much we had learned. And we thought it might be good to share what we’d learned with others. We see so many people making some of the same mistakes we did (I’m sure the vast majority of you won’t end up owing IRS nearly $90,000, but there are plenty of people with huge student loan debt, car payments, credit card debt, terrible spending habits and/or even worse money management skills), and a lot of mistakes we fortunately never did (but probably would have if we hadn’t been so fucking broke for so long). While it was an incredibly painful way to learn to be frugal, we’re both happy we learned the lesson. We’re also happy we learned it in our 30s and early 40s instead of in our 50s and 60s, when recovering from a set back this big, and still being able to retire some day, would be more difficult. Maybe, hopefully, we can help keep some other people from making similar mistakes, or help them get out from under them.

Kat

*Revisiting just how dumb we were even a few years ago, has been a little difficult at times. There were times I asked Scott, “How were we still spending money on _____ 5 years into this mess?” or “Why did it take us so long to stop doing _____?” But it was a good reminder of how easily we could fall back into old habits, and looking at it from another point of view, it was nice to see how different we view things now.