To me, the choice would be easy. 7 speed, 126mm spacing (double check the current spacing), Suntour Cyclone GT Generation 1 derailleurs with Suntour barcons. If your rear drops are already spread to 130mm, I would keep it at 130. Remove the wheel and check it, will take two minutes.

That first generation Cyclone is my favorite group, and is still available at a reasonable cost if you are patient. Just picked up a set last week off ebay.

A jump from 126 to 135 is doable, but should be done with a professional cold set. I have tried to squeeze in a 135 hub into 126 dropouts, it was not a good idea.... But with a cold set, you would be fine. I would not do it, that bike would be just fine with seven speed stuff.

Touch up paint? Get a couple of colors of Testors enamel model paint (Hobby Lobby or similar), and a soda bottle cap, and custom mix your own. I do it all the time. Note, this is for minor touch up, a chip here and there, a scrape on the bottom side of the chain stays from a kickstand, and so on.