College 101
Bankruptcy and You
Declaring Bankruptcy in Your Twenties: A Crappy Proposition
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Ah, your twenties. It's a time for getting acquainted with new responsibilities, expanding your identity, and learning how to make it to 3:00PM without six energy drinks and a mid-afternoon nap. It can also be an extremely financially turbulent time. Student loan debt, car payments, rent, and other expenses help to account for the $45,000 in debt that the average twenty-something carries (source).
So with all that debt and not enough experience to land a killer job to pay it back, what happens? If you guessed a Disneyland vacation, you're wrong, but good try. Bankruptcy is more likely; there's no great time to go bankrupt, but doing so in your twenties can seriously hamper your ability to bounce back. Unless you're half gummy bear.
There are two major forms of personal bankruptcy: chapter 7 and chapter 13. Chapter 7 bankruptcies can be called liquidation; all assets that are not exempt are turned into cash and used to pay your outstanding debts. Chapter 13 bankruptcies are less severe; a debtor can keep certain assets, because the debtor sets up a plan to repay a portion of what they owe over a series of years. However, with chapter 13, the debt isn't entirely discharged until debtors successfully pay what has been agreed. Chapter 7 is the nuclear option, while chapter 13 is a little more drawn out.
Once you've declared bankruptcy, it's not like you can just hop back in the ring and start racking up debt again. Debtors are required to get both pre-bankruptcy credit counseling and pre-discharge credit counseling (source). Even after the debt has been discharged, former debtors can expect to spend years recovering from the effects. Your broke friend Mike might finally stop trying to get a loan from you, though, so that's a plus.
A bankruptcy on your financial record will probably have consequences like sky-high mortgage rates and increased difficulty procuring loans. It can also have unexpected effects, like the inability to get PLUS loans to finance college for seven to ten years after filing (source), diminished job prospects (source), and difficulty getting financial investment for a small business (source).
Bankruptcy is not a death sentence, but it can feel like getting your financial future back will take forever. The best way to mitigate that struggle is to avoid getting into a financial tangle that can only be undone with a flaming sword. You should stay on top of your bills, monitor your credit score, keep an open line of communication with your creditors, and cut down on unnecessary spending. No, getting ultra-VIP seats to the Rolling Stones show isn't how you should be using your emergency savings fund.
A little foresight and care can go a long way when it comes to preventing financial ruin and trust us, your twenties will be much more enjoyable and stress-free if you can avoid bankruptcy.