Your 20s can be a time of great financial challenge: You're not quite skilled enough to get the job of your dreams in the "real world," yet you have real bills and financial responsibilities that demand a salary you can't command.
Worse yet, you may be contending with a mound of student loan debt, credit card bills, car payments, and other income drains. While filing for bankruptcy may seem like an easy way to end the nightmare of debt in your 20s, it's not a solution. In fact, it will very likely cause you more pain than relief in the long term.
Below are five reasons why declaring bankruptcy may not be a good idea for your financial future.
1) It Won't Wipe the Slate Clean
A 2019 Pew Research Center analysis indicated that a record one-third of U.S. adults under 30 years of age is carrying some form of student loan debt.
Filing bankruptcy won't solve a thing if student loan debt is partially to blame for your financial woes.
In 2005, the Supreme Court ruled in favor of the government's ability to collect defaulted student loans by "offsetting Social Security disability and retirement benefits without a statute of limitations."
Not only will bankruptcy not wipe out your student loan, but the government can garnish 15% of your social security retirement benefits if you don't pay.
2) You're Neglecting the Real Issue
Most people in their 20s obtain that first "real" job, first "grown-up" apartment, and learn how to make the sacrifices required to live within their means. Many people in their 20s are developing the skills and discipline required for becoming responsible and self-sufficient adults.
Those who learn how to manage money during this time may learn to build the savings required to make a down payment on a future home, buy cars without the help of a lease or high-interest loan, and eventually afford the joys that real financial freedom offers, such as frequent vacations or early retirement.
There are many steps to improve your financial health, and if you are in your 20s, bankruptcy may not be a good one to take.
If you find yourself struggling with managing your finances, and debt is snowballing into more debt, there are solutions beyond bankruptcy. Taking a second job for more income, consolidating your debt, eliminating unnecessary spending, and paying down your debt little by little, may all help you re-adjust your finances.
And by taking action and learning how to manage your money, you may emerge with the experience and skills necessary to handle finances better in the future.
3) You Could Hurt Your Job Prospects
Depending on the type of bankruptcy you file, a record of your bankruptcy can be on your credit report for seven to 10 years. Many employers have no interest in checking your credit score, but you give them the right to when you approve a background check.
- If you find yourself unable to handle your debts, there are steps to take to get your finances in order.
- Declaring bankruptcy may not wipe out your student debts.
- A damaged credit score due to bankruptcy can take up to 10 years to fix.
If you plan to work in any position involving the handling of money or even in non-financial roles within the insurance, finance, law, or even academic industries, your credit will likely be one facet of your background check, and it could deem you ineligible for a job.
Why does it matter? According to human resources experts, like Lisa Rosendahl, a deputy human resources officer at the U.S. Department of Veterans Affairs in St. Cloud., Minn., how a person manages his or her own personal finances is an indicator of how he or she may manage someone else's.
4) You Could Become Homeless
Once you file bankruptcy, the option to buy a home is usually "off the table," for seven to 10 years, as well. More importantly, filing bankruptcy may lead to a future filled with declined rental applications.
Many landlords will check your credit before they approve you for a lease arrangement, and having a bankruptcy is usually a red flag that you could be a risky tenant who won't pay rent.
5) Credit Will Be More Expensive and Limited
Once the seven to 10 year time period has passed on your bankruptcy, you'll have to work hard to raise your credit score.
You will likely face limited access to credit and very high-interest rates until you can rebuild your financial reputation. And your credit score will typically take a big hit. It may not be at the top of your mind, but your credit score plays a role in many functions, including what you'll pay for car insurance, where you can live, and the rates you're given for credit cards.
But there are ways to repair your credit and get back on track, it just takes time.
The Bottom Line
If you file for bankruptcy, it will impact your credit score, your ability to rent or buy a home, and maybe even keep you from your dream job.
There are many ways to improve your financial future like taking on additional jobs for extra income, paying down or reconsolidating your debts, and even asking family and friends for help.
When you are in your 20s, or at any age, paying down debt isn't an easy process, but neither is bankruptcy, and the repercussions of the latter may last longer than short-term financial struggles. Setting financial goals for your future may keep bankruptcy at bay.