Legally you can file bankruptcy as young as 18. How much, and what kinds of debt can cause so much trouble for someone that they need to consider filing bankruptcy in their 20s?
To answer that question, I will explain more from our annual profile of an insolvent debtor. This study shows what types of debt causes severe financial problems for someone so young. The issues vary from situation to situation and are more complex than most expect.
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The average 20-year-old with problem debt
In 2020, more than 1 in 6 (17%) bankruptcies and consumer proposals involved people aged 18 to 29. More people file bankruptcy in their 20s than file while in their 50s or 60s. This is despite the fact that younger debtors have had less time to develop a credit profile and borrow money.
On average, bankruptcy filers in their 20s owe almost $42,000 in consumer debt (non-mortgage debt). You might think that’s mostly student loans, but you would be wrong.
Here’s what the average person in their 20s who files a bankruptcy or consumer proposal owes:
|Credit card debt||$8,627|
|Student loan debt||$4,273|
|Other unsecured debt||$3,091|
|Non-mortgage secured debt||$8,419|
The unfortunate truth is that gaining access to a lot of credit very young is easy. However, young debtors typically have a low credit score. This means the types of credit they can acquire, outside of student loans, often carry high interest rates. Unfortunately, what seems like a good decision at the time, can have long term negative consequences.
Almost half (48%) of our clients aged 18 to 29 carry at least one payday loan. They are the most likely among all age groups to turn to a payday lender when facing a cash flow crisis.
Payday lenders have aggressively marketed to young borrowers in recent years. Advertisements target Millennials and Gen Zs with images of a carefree lifestyle and the freedom to buy what they think they need. Fintech companies capitalize on a young borrower’s propensity to use online payment and borrowing options.
The problem is that many young people turn to payday loans to cover basic living expenses, like rent, groceries or a car loan payment. It’s a short-term fix that often leads to a second or third payday loan. On average, debtors aged 18-29 end up owing $4,939 in payday loan debt to almost four different payday lenders.
Payday loans create a debt trap that can be stopped with a bankruptcy or consumer proposal. Payday lenders are unsecured creditors, which means payday loan debt is dischargeable by filing bankruptcy. A bankruptcy or consumer proposal can stop collection actions for unpaid payday loans.
Almost 2 in 5 (38%) debtors in their 20s have student debt. The financial burden of paying for their education is magnified by the need to pay for food, housing, transportation, and other living costs.
The challenge for a young debtor with student debt is that bankruptcy law does not discharge government student loans until you have been out of school for seven years. This is particularly burdensome for a person who did not complete their post-secondary education but is still saddled with student loan repayment.
Private student debt (a student credit card or line of credit) can be discharged with no waiting period.
Accounts in collection
Younger debtors tend to have smaller dollar accounts and accounts that have been sent to a collection agency. Having accounts in collection does not mean you need to file bankruptcy.
- If your debts are older than the limitation period (two years in Ontario), a court will not grant a judgement to allow a creditor to collect on that debt (if they know the age of the debt).
- If you have several accounts in collection, along with other unsecured debts, bankruptcy protection through a stay of proceedings can stop collection calls and a wage garnishment.
Car loan shortfalls
Another problem facing young millennials and Gen-Z borrowers is finding an affordable car loan. A car loan payment is a significant contributor to consumer insolvencies among those aged 18-29. Our most recent study shows that 42% of debtors 18 to 29 had financed or leased a vehicle at the time of filing. Of those who do, one-third were underwater; they owed more on their car loan than the vehicle was worth. These percentages somewhat understate the magnitude of the problem since some borrowers return their vehicle to the lender before their bankruptcy filing.
What begins as a simple auto loan (the average car loan debt was $17,284 in 2020) morphs into a financial problem. Without good credit, young drivers turn to vehicle lenders who specialize in high-cost, low credit auto lending. If they get into an accident and need a vehicle replacement or level up as the car ages, many end up rolling over the balance of their original car loan into the new loan. The result is higher loan payments and a larger loan-to-asset shortfall.
One-third of all financed or leased vehicles among young debtors had negative equity, a higher shortfall percentage than any other age group.
A shortfall on a vehicle loan can be discharged through a bankruptcy or consumer proposal if the debtor chooses to surrender the vehicle or the vehicle is repossessed by the lender.
Should you file bankruptcy in your 20s?
If you are carrying significant debt in your 20s, filing bankruptcy or making a settlement proposal with your creditors can act as a reset.
First, the downsides:
- Declaring insolvency will not eliminate your student debt if your end of study date is less than seven years ago.
- A bankruptcy stays on your credit report for seven years from completion.
- A consumer proposal is removed no later than three years after completion.
However, living with the burden of several thousand dollars in consumer credit for the long-term is not a great option. Our study clearly shows that, among those struggling with debt repayment, total debt increases over time as you continue to live off more and more credit.
Here are some common myths and concerns that may be influencing your decision:
- Bankruptcy will not generally affect your job prospects. Unless you are in a profession that requires disclosure that you have filed bankruptcy, a future employer does not need to know you filed.
- While you must make a monthly payment based on your income, you do not pay a Licensed Insolvency Trustee a separate or upfront fee. Trustees are paid by government tariff (a set schedule) out of the bankruptcy funds before distributing any money to your creditors.
- You will be eligible to obtain credit again. The sooner you eliminate problem debt, the sooner you can begin rebuilding a better credit history.
- Filing bankruptcy now does not mean that you will no longer be able to buy a better car or get a home mortgage. In fact, filing insolvency now can ensure you are more financially able to manage those payments in your 30s.
Bankruptcy is not your only option to deal with problem debt. In fact, seven in ten filers in their 20s choose a consumer proposal over bankruptcy to eliminate debt.
Bankruptcy is a solution to help you turn your situation around. As Licensed Insolvency Trustees, we have the knowledge and experience to help you decide if filing bankruptcy is the right option and can help you through the bankruptcy process. If you would like to discuss your financial situation, contact us to book a free consultation.