Filing bankruptcy at a young age can feel like you failed from the start. But the truth is, it might be one of the best financial decisions you can make.
The financial pressures on young people today can be tough to manage. Millennials and Generation Z face higher costs than any generation before them. Student loan debt continues to rise and saddle young people with a significant debt burden from a young age. Meanwhile, the cost of living across Canada has gotten out of control, and when you’re paying so much in rent, it’s impossible to get ahead. They have to manage it all on entry-level salaries or with part-time jobs as they try to start their careers. And that’s before your own circumstances enter the picture. Plenty of young people are put in a tight financial spot that’s simply out of their control.
Debt can hold you back from your goals and plans. Anxieties about money are causing young people to delay having a family, buying a house, or changing careers. Trying to pay it back on your own might take years longer than it needs to and cost you thousands more in interest charges than you need to pay.
What Kinds of Debt Do Young People Have?
When you talk to David Sklar & Associates trustees, they’ll take a look at your complete financial picture, including what types of debt you’re carrying.
It’s not just student loans that most people in their 20s are struggling with. Young people are more likely to carry high-interest debt that’s beyond their means to pay from a variety of sources. It’s only become easier and easier to access credit from a young age. Easy access to credit and misleading advertising from aggressive lenders can make it very tempting to borrow when cash is tight.
Student loan debt is usually the first major source of debt young people experience, and it can put them at a disadvantage from the day they graduate. Average student debt loads on graduation vary based on education levels. The average college student’s debt was $15,300 in 2015, while the average was $28,000 for those who graduated with a Bachelor’s degree. Those numbers have only gone up as tuition and cost of living have increased since Statistic Canada’s last survey.
You might think that most people filing bankruptcy young are trying to get out of student loans, but the rules around filing bankruptcy on student loans are unique. These loans cannot be discharged through a bankruptcy or consumer proposal until 7 years after the borrower was last a full-time or part-time student.
Credit Card Debt
Credit cards make overspending easy. Usually, you don’t even notice you’re spending beyond your means when you can just put it on plastic. Unfortunately, credit cards come with high-interest rates and penalties if you can’t pay your full balance at the end of the month.
Payday loans are a very dangerous type of debt and often lead to filing for bankruptcy among people in all age groups. Payday lenders have been targeting young people more and more, and they’re using Fintech apps to give young borrowers access to credit right from their phones.
Short-term loans often come with super-high interest rates that can be crippling to repay. When you borrow against your paycheque one week because you’re short on cash, you’re only delaying the problem until next week. The problem is, the later you pay, the more you owe in interest, penalties, and fees.
Car loans can turn into a major problem for Gen Z and younger Millennial consumers, and it can quickly lead to filing for bankruptcy young. Young people tend to lack a credit history, which can make it as hard to qualify for loans as having a bad score. Lenders offer these borrowers higher interest rates and longer terms. That means you pay more in the end, often by thousands of dollars.
Unlike real estate, which is often considered an investment, vehicles depreciate rapidly. You wind up owing more than your car is worth, meaning there is no easy way out of the debt. If you sell the car or total it in an accident and get the insurance money, you still won’t have enough to pay off the balance, leaving you with no option but insolvency.
4 Reasons Filing Bankruptcy Young Makes Financial Sense
Filing bankruptcy young will help you reset your finances and potentially clear thousands of dollars in consumer debt. To determine if bankruptcy is the right choice, you should compare it to your two other options: filing a consumer proposal or paying your debt back on your own.
#1 You’re Less Likely to Own Assets
If you own a lot of assets, bankruptcy is not as appealing an option as an alternative like a consumer proposal. The way consumer proposals in Canada work is that you make a monthly payment to a licensed insolvency trustee who distributes it to your creditors. A portion of your debts will be forgiven, and you don’t pay interest while your assets are protected.
When you’re young, you’re less likely to have much wealth, especially assets that aren’t exempt from bankruptcy proceedings. Bankruptcy can get you out of debt faster and for less money, and if you have no equity to lose, it makes sense.
#2 You Won’t Owe Surplus Income
Another factor to consider before filing bankruptcy young is surplus income. A first bankruptcy lasts 9 to 21 months, and during that period, you must pay 50% of any after-tax income you earn above a government-mandated threshold. This is often less of a concern for young people who are working part-time or earning entry-level incomes.
#3 Bankruptcy Is Faster than Consumer Proposals
Bankruptcy and consumer proposals will appear on your credit history. That can make it harder to qualify for a loan in the future, including credit cards, car loans, and mortgages, but eventually both will be removed from your credit history.
If you are a first-time bankrupt and you have no surplus income, your bankruptcy will be over in 9 months. It will be removed from your credit history 6 years after discharge. By comparison, a consumer proposal can last as long as 5 years and remain on your history for 3 years after you pay off your debts.
Bankruptcy can leave you with a clean credit report a year and several months earlier than a consumer proposal, though there are other factors at play.
#4 You Have More Time to Bounce Back
The biggest advantage you have filing bankruptcy young is that you have more time to bounce back. Statistically speaking, in your 20s you are likely earning a fraction of what you will be later in life. Your earnings tend to peak later in life, and they can grow quickly.
This may not be true for everyone, but it means you have the best chance of recovering quickly and making the most of a fresh financial start.
What You Need to Know About Filing for Bankruptcy in your 20s?
Dealing with huge amounts of debt is stressful and nerve-wracking no matter how old you are, but in your 20s, it can be even more daunting. These are some of the most common questions we get about filing bankruptcy young.
Can bankruptcy help with student loans?
Unfortunately, student loan debt and consumer proposals or bankruptcy is complicated. Student loan debt cannot be discharged through insolvency until 7 years have passed since you were last a student. If it cannot be discharged through insolvency, you should keep making payments on time and in full.
For advice on getting out of student debt, check out this article on how to pay student loans faster. Using gifts, tax refunds, and extra income to make more than minimum payments will reduce the amount of interest you have to pay in the end. If other debt obligations have made it difficult to keep up with student loans, bankruptcy or a consumer proposal can also free up funds.
How old do you have to be to file bankruptcy?
Legally, at least 18, but in that time, it’s unlikely that you have amassed enough debt to be in serious financial trouble. Bankruptcy becomes tougher and longer the second time you file, so it’s not something that should be considered lightly.
How young is too young for bankruptcy?
It has less to do with age than it does with your financial situation. Talk to a Licensed Insolvency Trustee who can review your circumstances and advise you on how to proceed.
Bankruptcy isn’t an easy decision to make, but if you are in a tough debt situation, it might be the best way out. Your 20s and 30s are a time when you should be investing in the life you want to live. Instead, many are stuck paying back debt and just getting by, while life plans like starting a family or pursuing a dream career get put on hold. Don’t let debt hold you back. Despite the stigma, bankruptcy can be a sensible financial plan.