A Simple Example May Show You Why Bankruptcy Is A Better Option
You may be wondering why you should file for bankruptcy. After all, that minimum payment on your credit card debt seems manageable. You can afford to pay it. Isn’t it better to just pay the minimum payment, and not file for bankruptcy?
Sometimes, it may be—bankruptcy isn’t right for everyone, and the choice to file for bankruptcy is an individual one that you should make based on your own circumstances, and perhaps after consultation with a bankruptcy attorney. But you should not be fooled into thinking that because a minimum payment on a given card is affordable, everything is financially under control.
A Simple Example
The reason why bankruptcy may be a better option has to do with math.
Let’s take a simple example: A $10,000 expense put on a credit card with a 10% annual percentage rate (APR). The credit card company says that you need to make a $100 monthly payment. You can handle that, right?
But wait a minute. Not all of that $100 goes to the principal $10,000 loan. Remember your interest. During your first year, 10% of $10,000 = $1,000, which is $83 per month. That means that out of your $100 monthly payment, a grand total of just $17 per month is going to pay down principal.
You do that for a year. It’s now year 2. You’ve only paid down $204 in Year 1 ($17 x 12 months). In year 2, you have slightly less interest, because your principal is smaller by $204. You now owe $9,796, so 10% interest is $976 or $81 per month. That means $19 per month is going towards principal.
Year two is now over, and you have now paid $204 in year 1, and $228 in year 2. So in 2 years, you have paid a grand total of $432 towards your $10,000 principal.
You see where this is going? Nowhere fast. The credit card company is purposely showing you small minimum payments because it will take forever for you to ever pay the debt back making the minimum payment. Yes, you could shorten the time period by voluntarily paying more than the minimum payment. But few people do. And the longer you make payments, the more interest you pay, and thus, the more the creditor makes off of you.
How Long Will it Take?
In fact, online there are amortization calculators that will tell you how long it will take you to pay off your debt.
In our example, with the $100 payment, and 10% interest on a $10,000 debt, it will take you 216 months – 18 years – to pay that debt off. And, you will have paid an extra $11,590 in interest. In other words, you have paid more than double your principal, just in interest payments.
And this is one credit card debt, not multiple debts, as many people have. And this is showing a very reasonable 10% APR–not higher interest rates, which many cards will charge.
Hopefully you see how easy it is to be mired in an impossible debt prison, and why bankruptcy can help you end this never ending cycle of debt