[flumbaps]

I think you're both over-estimating AND under-estimating the rationality of people's behaviour. It is important that going bankrupt is somewhat unpleasant. If it wasn't, then normal people, who are somewhat rational, would have no incentive to pay back debt, and defaulting on loans would become normal. However, some people are always going to fail to think ahead and try to borrow irresponsibly. Even if bankrupt people were put in the workhouse and given punishing physical labour, those kinds of people would still be financially irresponsible. That's why the poorhouses were never empty, despite them being horrible places by design. Saddling people with debt forever won't stop irresponsible borrowing. Being broke is already horrible and punishing people harder is unlikely to make them think more rationally.

I'm guessing you're probably a smart person who thinks ahead and makes smart choices - you have to understand that not everyone in the world is like that. Punishing people who are not like that is unlikely to change them. You can't punch someone in the face to make them smart. You can punch someone in the face to make them obey you, but in this context that would mean singling out all irresponsible people and then punishing them before they take out a loan, not after. If you were able to identify irresponsible people then you might as well just not lend them any money.

Which brings me to the real benefit of bankruptcy. That is, if you really want to stop irresponsible borrowing, then it makes a lot of sense to also discourage irresponsible lending. Banks and credit unions are far more rational than the general population. If individuals are allowed to go bankrupt, there is a clear incentive not to lend money to people who don't have the means to pay off the debt. By providing that incentive, it then becomes the problem of the lender to identify whether or not an individual is likely to be able to pay of a loan. The lender is has a lot of information and resources through which they can make such a determination.

Now, different people have different ideas about the morality of this situation. Some would say that it's wrong for banks to take advantage of the irrational people, so it makes sense to provide incentives for responsible lending. Others would say that if individuals are irrational, then they get what they deserve, and banks should only be required to behave rationally. Personally, I don't think stupidity is morally wrong (otherwise dogs would be pure evil), and it's often quite self serving to argue otherwise.