Debt is money. So, if we pay off all the debt then we won't have any money other than (probably) physical notes but even then there won't be any debt for the central bank to collateralise the physical notes - physical notes are a central bank liability and therefore must be balanced with an asset (debt, usually).

Debt isn't inherently bad. However, if mis-managed or abused then both creditors and debtors get into trouble.