When trying to decide between filing bankruptcy or paying off credit cards outside of bankruptcy, it’s important to consider how difficult it can be to pay off credit card debt where the balance owed has grown significantly. For example, if you owe $10,000 on credit cards with an interest rate of 15% and pay only a minimum payment of 4% of the balance each month, it will take nearly twenty (20) years to have the debt repaid. And that’s assuming you’re no longer using the credit card. If the interest rate is higher than 15% or the minimum payments are lower than 4% of the balance, the length of time to pay the debt off will be even longer. The law requires credit card statements to tell borrowers how long it will take to pay off the debt by only making minimum payments.
This is why I tell clients that my general belief is that if you can’t pay off all unsecured debt in about four years, you’re better off filing bankruptcy. Even filing a Chapter 13 bankruptcy, where there’s no interest accrual and usually no need to repay all the debt, is often preferable to struggling with credit card debt for decades. I think the retirement accounts we all need to fund, the college accounts for our kids that most of us need to fund and the charities that everyone needs to support are far more deserving of the money. It might be okay to struggle for a short time to get out of debt but I don’t think there’s any reason to struggle for years to do it.
The bankruptcy code was written to give people a chance to choose a different way to deal with debt. It’s similar to the instruction given to the leaders of ancient Israel to forgive debts and start fresh. No one needs to feel guilty for choosing to make a clean financial start.