Bankruptcy vs. Long-Term Repayment

Choosing between bankruptcy and long-term repayment of debt is a deeply personal decision. There are so many variables that the choice isn't the same for everyone. A graduating college student with excessive credit card debt figures to work for decades and thus has plenty of time to pay off long-term debt. However, a couple nearing retirement with tens of thousands of dollars in medical bills may decide to file for bankruptcy so they can enjoy retirement debt-free.

Credit Cards

Credit cards are a form of long-term debt and are also one of the leading causes of bankruptcy, according to the Federal Trade Commission. A person able to make only the minimum monthly payment may need decades to pay off maxed-out credit cards. The situation becomes even worse if the debtor suffers a setback such as illness, divorce or long-term unemployment. Any of those events could make it impossible to make even the monthly payments. That could lead to defaults on the cards and, eventually, lawsuits and court judgments. At that point some people may choose bankruptcy rather than working out long-term repayment plans.

Bankruptcy Types

The type of bankruptcy available to the debtor is another important consideration. BCS Alliance reports that people eligible for Chapter 7 bankruptcy should consider it if they are deeply in debt and have few options for paying their bills. Chapter 7 wipes out debt fast, with the process lasting only a few months. A person could eliminate, say, $50,000 in credit card debt in three or four months during Chapter 7 versus making monthly payments for the rest of their lives. Chapter 13 is another form of bankruptcy but requires a payment plan of three to five years. The bankruptcy court discharges, or eliminates, unsecured debt remaining at the end of the term. Chapter 7 has income eligibility requirements that are different depending on the state. Usually, only people with low incomes qualify. Chapter 13 is open to everyone.

Personal Beliefs

Some people feel a moral obligation to pay their debts, making it difficult for them to choose bankruptcy over long-term repayment. They would rather find ways to speed up the repayment process by cutting back on expenses and finding second jobs. Paying off the debts, even over the long term, gives them a sense of pride and avoids the embarrassment of bankruptcy.

Credit Issues

Bankruptcy is very bad for credit, and makes it difficult to qualify for loans at reasonable interest rates for at least two or three years after bankruptcy. Credit scores are often unaffected or even enhanced by long-term payment of bills. However, having excessive credit accounts with large balances can be a drag on credit scores. Bankruptcy information remains on credit reports for at least 10 years.