I'm a Broke Millennial. Should I Declare Bankruptcy?
Experts say a generation struggling with debt is behind the dramatic rise in insolvencies. Here’s what you can do if you are drowning in debt.
Illustration by Adam Waito
Blame credit card interest rates. Blame record levels of student debt. Blame poor money management. Blame precarious work. Blame wages that can’t keep up with the rising cost of living. These are all behind the recent spike in millennials going broke, according to debt experts.
Bankruptcy firm Hoyes, Michalos and Associates, which handles around 15 percent of bankruptcies in Ontario, recently said that people between the ages of 23 and 38 are filing insolvency at a faster rate than any other group, accounting for 37 percent of cases. On average, they owe $35,733.
“They’re much less concerned about the stigma," said Doug Hoyes, one of the firm's co-founders. "They figure ‘I’m never buying a house anyway, so I’m not too worried about what the impact is going to be on my credit report. I’d rather deal with my debt now because then I might have a fighting chance in the future.' That’s different from previous generations.”
Recent figures from Canada’s largest bankruptcy firm, MNP Ltd., suggest that nearly half of Canadians are $200 away (or less) from being insolvent, which means owing $1,000 or more once your monthly expenses are accounted for. MNP also sees signs that people in their 20s and 30s are increasingly going broke.
The latest Ipsos survey for MNP paints a sobering picture of how they feel about their finances. Respondents aged 18 to 34 were much more likely than older respondents to be concerned about and affected by rising interest rates. Millennials (64 percent) were also more worried that the higher cost of borrowing would push them into financial trouble, compared with Gen X (52 percent) and Boomers (38 percent).
A red flag is when you go from living paycheque-to-paycheque and start using debt to pay off your debt—like tapping a line of credit to deal with credit cards. Young people are the most likely to have high-interest debt such as credit cards, which typically charge about 20 percent, or payday loans. That’s when things can quickly spiral out of control.
“Millennials are big users of payday loans and the interest rates are wickedly high. Even if the maximum charge is $15 on every $100 borrowed, if you’re constantly getting a loan every two weeks and you do that 26 times a year, you will have paid $390 interest on a $100 loan—that’s 390 percent interest,” said Hoyes. “It’s very clever marketing.”
If any of this sounds like you, here are things you can do to figure out your next move:
Understand how much trouble you are actually in
“Figure out who you owe money and what it costs you to live,” said Hoyes. “Include the amount of interest you’re paying. If the minimum payments are more than your income, then you have a serious problem.”
Make a budget that lays out how much money you earn and how much you’re spending. You’ll need to pull out bank statements and bills from all your expenses and obligations.
An ideal millennial budget allocates 50 percent of your income to cover essentials such as housing, groceries, utilities, and transportation. Thirty percent can go towards things that are nice to have, such as a gym membership, eating out, and vacations. Things like unlimited cell phone data and clothing can seem like a need, but are actually a want.
Finally, 20 percent of your net income should be stashed away or invested for your future. This may sound like a lot, but financial experts say this kind of rainy day fund is especially important for millennials because they’re most likely to be precariously employed, without access to corporate or federal pension plans.
Once you can see it in black and white in front of you, you can quickly get a sense of whether your situation is sustainable. Do you just need to cut back on meals and going out for the next few months, or is this only going to get worse in the coming weeks?
Make more money or reduce expenses
If your money problems are serious, and your debt is ballooning, then you need to do more. This may involve being disciplined when it comes to spending or getting creative to generate more income. Can you ask friends or family for a no or low-interest loan to help you out?
If your finances need a significant boost, Hoyes recommends getting another roommate or picking up a part-time job. “If you have a bicycle can you deliver food? If you have access to a car, can you become an Uber driver? It’s a math question and when you put it on paper, it becomes pretty obvious if that’s possible or not. If you can’t, then you need a more formal solution.”
Consider a debt consolidation loan
If your debt is mounting quickly, and the Bank of Mom and Dad isn’t an option, you need damage control. According to Hoyes, this might mean borrowing money, by accessing debt that is easier to service. A loan from a bank or another traditional financial institution might mean interest is only 6 percent, rather than double or more on a payday loan.
Keep in mind however, that this isn’t an option for a lot of young people who may have turned to payday loans because they didn't qualify at the bank, and Hoyes calls it a temporary fix. “The problem with a debt consolidation loan is that it doesn’t reduce your debt; it reduces the interest," he said.
According to David Gowling, senior vice president, MNP, young people may turn to payday loans hoping for a quick cash injection, only to realize too late that they’ve compounded their debt problems.
“I had someone who borrowed $5,000 as a payday loan and they thought it was great because their weekly payment was only $80. I pointed out that of that $80 only $10 was going towards principal. When it was all said and done, they were on the hook for more than $15,000. They were paying 59.9 percent interest,” he said.
Research your legal options
If your debt situation has become unmanageable, it may be time to explore one of two legal avenues: a personal bankruptcy or a consumer proposal. Filing for either option requires professional help and should only come from a licenced insolvency trustee.
Claiming bankruptcy can be the faster route—if it’s your first time, and you’re not making more than the maximum income threshold, which varies depending on the size of your household, you could be done in nine months. However, if you earn more, your bankruptcy is extended to 21 months. If your income changes, the monthly repayment terms have to be adjusted.
A consumer proposal, on the other hand, involves going through your finances with a trustee who will come up with a deal that is presented to your creditors—and they have to agree to it. A consumer proposal involves paying more to your creditors than bankruptcy but it allows flexibility on the repayment period, meaning your monthly payments may be lower but over years rather than months. Once terms are locked in, they don’t change, regardless of your future income. This alternative to bankruptcy is becoming more common.
There are pros and cons to both options and both routes force creditors to stop hounding you for payment. Both result in a negative hit to your credit rating for years after you’ve gone through the process, and make it more difficult to borrow money in the future.
Choosing between the two isn’t easy. Gowling suggests thinking very long-term when you’re looking at your options. “It might be tempting to go the bankruptcy route because it’s faster and cheaper, but if you’re putting yourself in a precarious financial situation, you could end up filing again in your 40s,” he explained.
Going broke and filing for bankruptcy a second time is more punitive because it lasts longer and the bad mark on your credit rating sticks around longer too.
Regardless of what you choose, Hoyes says when it comes to your finances, putting off decisions means the interest on what you owe keeps mounting. “Don’t delay because debt doesn’t get better on its own and time is against you,” Hoyes said.
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