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How bankruptcy could help you save for retirement

The individuals and institutions that lend money do not particularly like Chapter 7 bankruptcy. If you successfully filed for this economic protection, then you would no longer have to pay off your debts in most cases. 

To you, this could be a chance to get your life back on track. To lenders, bankruptcy represents a great deal of interest revenue lost — interest that you would be earning instead of paying. Read on for a picture of how bankruptcy could change your future.

The True Cost of Debt

In a purely hypothetical example, imagine you had $10,000 of credit card debt at 12 percent interest and you were able to make a minimum payment every month of the greater of 2 percent or $25. Paying it off would take you almost 25 years, and you would have paid almost double of your initial bill. That is assuming that you do not make any more charges and you do not incur late fees. Yes, you would still have credit — but using it would put you deeper in debt.

The True Benefit of Saving

Imagine another scenario in which you were able to free yourself from debt via bankruptcy, secure a decent job. You would have damaged credit for the first 10 years, but that would not stop you from saving. You could start putting $150 in a long-term retirement index account that had a 12-percent 30-year return. After 25 years, your investment could be worth around $270,000.

In the first situation can you are paying the bank. In the second one, your investments are paying you. You do not need credit to invest in your future — all you need is capital. Spare cash to save is something you will probably not have if you are struggling to pay off debt in the face of high card interest.

There is another factor: Constant creditor harassment and the psychological impact of debt could make it more difficult for you to maintain your career. It could also make it harder to preserve the stability at home that you need to pursue more gainful employment. Having damaged credit is a challenge, but good credit is not the only measure of financial success.

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