How Young Is Too Young For Bankruptcy?

Posted in Personal Bankruptcy
Posted by J. Douglas Hoyes, CA, CPA, LIT, CIRP, CBV

Bankruptcy CanadaFinancial problems can happen at any age. While the average age of the typical bankrupt person we see is in their mid-40s, we have helped individuals as young as 18 and as old as 91. Although filing insolvency is fairly rare for people in their 20s, it is not uncommon. In fact, a study by our firm found that 14 percent of all insolvencies were filed by individuals under the age of 29.

What causes someone so young to file for bankruptcy?

Younger bankrupts are more likely than the average debtor to list financial mismanagement as a cause of their bankruptcy. It is not, however, the sheer magnitude of their debt that is at issue, but rather the types of debt they are incurring.

In fact, debtors in their 20’s have the lowest unsecured debt of all age groups. They haven’t had a lot of time to accumulate a lot of debt. Even their unsecured debt-to-income ratio is low – 120% as compared to 185% for the average insolvent debtor.

For many millennials, it is instead the inability to find a job that pays well enough to cover living costs and, in many cases, repay their student loan debt. A growing area of credit mismanagement for younger debtors is the use of high cost debt options like credit cards, subprime car loans and payday loans. Inability to qualify for better credit options means that they are increasingly turning to subprime debt choices like payday loans. Over one third debtors below the age of 30 carried at least one payday loan. This demographic exhibits the highest usage of payday loans among all age groups even if their total payday loan debt, at $2,292, is lower.

Should You File Bankruptcy? 3 Big Considerations

Whether or not someone in their 20s should file for bankruptcy depends on what debts they carry and what recovery potential they have.

Non-forgivable Debts

An increasing number of insolvent young debtors carry student loans. In our most recent study, 31% of all young debtors had a student loan. However, it is important to understand that millennials (those in their early 20’s) are not filing bankruptcy to get out of paying their student debt obligation. In fact, they can’t.

In Canada, student loan debt cannot be included in a bankruptcy until a debtor has ceased to be a student for at least seven years. While not impossible to have their student debt forgiven earlier, certain conditions of undue hardship must be met. If the only debts owed by a young debtor are student loans that are not dischargeable, then bankruptcy is not a suitable solution. Those who are filing bankruptcy are doing so because they are also struggling under the burden of unpayable car loans, credit card debt and payday loans.

Credit Recovery

Filing bankruptcy should always be a last-resort option for a young person, even if your debts are fully dischargeable by bankruptcy as it will damage a young person’s credit for a period of time. In Canada, a bankruptcy remains on a credit report for six to seven years after discharge.

While it is possible to recover from the negative impact on your credit score as a result of bankruptcy, this process will take time. During this period, access to credit will be limited and any credit obtained will likely be expensive. This may be of particular concern for those looking to start a family, buy a home or even purchase a car.

Employment Considerations

While young debtors experiencing severe financial problems do file bankruptcy, almost half choose instead to make a proposal to their creditors. For those who are earning a higher income, a bankruptcy and its required surplus income payments may be too expensive. A consumer proposal allows them to lower their monthly payments and begin the process of managing to live within a healthy, balanced budget sooner. In addition, certain occupations do not permit an individual to be bankrupt. Potential employers today may even ask for permission to run a credit check as part of the hiring process. An individual who files a consumer proposal can confirm on a job application that they are, in fact, not bankrupt.

To Choose You Should Run the Numbers

For anyone experiencing debt problems, the best solution is based on a review of their individual circumstances. It is important that they sit down with a licensed bankruptcy trustee to review a list of their debts, their assets and their future earning potential.

The first step is to create a budget to determine how much the young debtor can apply toward debt repayment. If their debts can be repaid by following a structured payment schedule and they can rebuild their savings in less time than the resulting negative impact on their credit report, then filing bankruptcy may not be the best solution.

If, however, their debts are so severe that it is unlikely that they will be able to maintain much more than the minimum payments toward those debts for the foreseeable future, then bankruptcy or a consumer proposal may be the solution they need to start over. It is possible to begin to rebuild savings soon after filing, which can provide a necessary down payment for future credit needs when the time comes.

Should I file bankruptcy