How Young is Too Young for Bankruptcy?
What Age Can I File For Bankruptcy?
Regardless of age, financial issues are a common concern.
Individuals as young as 18 can be subject to bankruptcy under Canadian law.
Though the financial decision of bankruptcy is common amongst all age groups, generally younger individuals have less opportunity to accrue financial experience, and are therefore more subject to disadvantageous fiscal situations.
Issues Leading to Bankruptcy
There are multiple different causes of debt, each contributing to a bankruptcy ecosystem in a different manner.
Sometimes, the issue is rooted in poor budgeting skills and therefore the misspending and investing of money.
In other situations, young folk are prone to accruing debts which not only don’t facilitate healthy credit – they actively damage the consumer’s financial landscape.
Types of Debt
Usually, debt is broken down into three distinct categories – each with different virtues and pitfalls.
The first of the three is called secured debt.
This is basically debt that is backed by some form of collateral.
In the event that the consumer defaults on the loan or otherwise violates the agreement, the collateral is repossessed and its value used against the loan sum.
Conversely, unsecured debt is a type of loan which is not backed by any form of collateral.
Generally, these will have higher rates of interest and larger payments.
Though many individuals, especially younger consumers, may not have collateral and therefore gravitate towards unsecured loans, if unpaid, they result in heavy damage to the credit profile.
The third type of debt refers to revolving debt – anything where there isn’t an end date, really.
Revolving debt examples include credit cards and line of credit.
There is a certain amount available and a minimum monthly payment, where interest accrues on the amount unpaid.
Provided the card is paid on a regular (or revolving) basis, the amount remains available for consumer use.
Whereas credit cards, when used responsibly, have the ability to help credit situations, if they are not used properly, they can actively harm the financial situation and future of the user.
Common Issues with Debt
While debt is common and generally manageable, having too much debt, scattered debt, or situations where income stops due to unemployment, lead to the risk of bankruptcy.
Issues arise when types of debt combine, when multiple payment schedules and interest rates make paying debt unreasonable.
In cases where debt begins to snowball and the consumer is struggling with making minimum monthly payments, it is important to develop a financial plan.
Important considerations include forgivable debts, and considering whether there is an outside approach to managing the debt.
Student loans, for example, are forgivable provided there is significant financial difficulty for the debtor and they have not been a student for seven years or more.
Resultantly, this type of debt is usually not a contributor to bankruptcy.
Bankruptcy Facts and Alternatives
Especially at a young age, the pitfalls of bankruptcy are far reaching.
Though it is a viable solution in certain situations, it is not suited to all circumstances.
First, it helps to consider the types of debt (and their sources) from which the individual suffers, and then see if there are other ways to address the issues.
With a filed bankruptcy, the consumer’s credit report shows the occurrence for between six and seven years, even after the bankruptcy is discharged.
Though younger individuals generally have the time to improve their credit after the fact, it makes it very difficult to access any form of credit and makes it so the expected interest rates are far higher.
These situations are far more severe when considering automobile purchasing (car loans) and home developments (mortgages).
Instead, many choose to seek out different choices to prevent the state of bankruptcy.
The options include:
- Debt consolidation: This is when the consumer takes out a loan for a portion of the full sum of their original debt. The existing debts are paid off using the debt settlement approach and therefore getting a discounted rate. They are bought by a third party who effectively loans you the funds to pay out the debts. From there, you pay one single monthly payment with a lower rate of interest. This results in a significant savings over time.
- Debt settlement: When the consumer has a significant portion of funds, but not the full amount to discharge the debt, they can approach settlement options. In this situation, they pay, all at once, a fraction of what they otherwise owed and save on interest along with the benefit of closure on that debt.
- Credit counselling: Often, especially with younger adults, it can be challenging to know what the best financial decisions are. In fiscal struggles, because bankruptcy is such a common term, it can feel like the only approach. A credit counsellor can offer objective solutions and budgeting advice to assist in making solid financial decisions.
How to Decide
In times of economic difficulties, the first and most important thing is to take an inventory of your assets and liabilities.
Especially if you are facing bankruptcy, the best thing to do is speak with a licensed financial advisor who can set you down the right path.
They have the training and knowledge required to objectively assess how much you may earn in the future, your types of debt, ongoing expenses, and then come up with your ideal prospects.
Ultimately, it will be a matter of whether rearranging your existing financial situation will be sufficient to prevent the necessity of bankruptcy.
If there is a chance of using debt settlements or consolidation to improve your finances, then this is preferable to bankruptcy.
Conversely, if it seems that there is too much debt that you will not be able to keep up with anything more than minimum payments, bankruptcy may be the right solution.
If you are struggling with your financial situation and are unsure of the right path to take, speak to a Licensed Insolvency Trustee.
The meetings are confidential and offered at no cost, so there is nothing to lose and everything to gain.
By taking these steps, you start the journey to retaking control of your financial future.