When Bankruptcy Makes More Sense than Struggling to Pay Off Debt

I want to challenge the conventional wisdom that filing bankruptcy should be considered a last resort. Does that sound self serving coming from a bankruptcy lawyer? Maybe. But consider this table: Balance monthly payment time to payoff interest rate total interest total payoff $10,000 $300 44 months 15% $3,043 $13,043 $50,000 $1,500 44 months 15% $15,217 $65,217   As you can see, under the best of circumstances, it will take you 4 ½ years and $13,043 to pay off that $10,000 credit card debt, assuming that: you are no longer using your credit card for future purchases you have not been late, thereby keeping your interest rate from jumping to a penalty rate you make only the minimum payment of $300 per month Under this best case scenario, $50,000 of credit card debt will require $1,500 per month and you will end up paying interest charges totaling $15,217 for payoff of $65,217. What happens if you miss a payment? In addition to the late fees, your interest rate rises from 15% to a penalty rate, which is typically 29%. With a 29% interest rate, and a $300 per month minimum payment, your interest charge on that $10,000 balance will total $10,959 (totaling $20,959) and almost 6 years to pay off the debt.  A $50,000 balance, payable at $1,500 per month, will produce interest charges of $54,793 for a total of $104,793 over that 70 month period. Balance monthly payment time to payoff interest rate total interest total payoff $10,000 $300 70 months 29% $10,959 $20,959 $50,000 $1,500 70 months 29% $54,793 $104,793   You can run your own numbers at: http://www.cardhub.com/credit-card-calculator/ Remember, these calculations assume no on-going use of your credit cards and minimum payments only. The point here is this: if you have $50,000 or more of credit card debt, you are in a very deep hole that will require a great deal of austerity and discipline to escape.  More importantly, your capacity to pay off this debt will require stability in both your income and expenses.  Late or missed payments at any point during the payoff term can have catastrophic implications in terms of the interest rates you pay. Why Bankruptcy?
The bankruptcy option can offer a huge benefit economically. There are certainly non-economic factors to consider, such as:

• impact on your credit reports
• moral or religious aversion to filing bankruptcy

but speaking solely in terms of economics, the bankruptcy option is worth considering. If you can qualify for Chapter 7, you would be looking at a cost in the neighborhood of $1,500 to $2,000 to totally wipe out the $50,000 credit card debt. Basically for one monthly payment on your balance, your debt can simply go away. If you do not qualify for Chapter 7 and have to go to Chapter 13, you may end up paying back some percentage of your unsecured debt. However, there is no accrual of interest in Chapter 13 – you pay only the balance due at the time of filing. So if your plan called for a 100% payout to unsecured creditors, you would pay $50,000 (not $65,000 and certainly not $104,000) to your credit card lender over 5 (not 6) years. If your plan calls for a 50% dividend to unsecureds, then the $50,000 would turn into $25,000. Obviously other factors will go into your decision to file for bankruptcy, but I wanted to use the credit card example to demonstrate in very clear dollars and cents terms just how powerful bankruptcy relief can be.The post When Bankruptcy Makes More Sense than Struggling to Pay Off Debt appeared first on theBKBlog.