Generation Y Meets the Great Recession: Is Bankruptcy an Option for Young Adults?

Many members of Generation Y – people born from the early 1980s up to the millennium – are facing financial challenges as they reach adulthood that their baby boomer parents never imagined. Having come of age at a time when credit was readily available and the economy expanded and diversified all on its own, they are now particularly vulnerable to the effects of the Great Recession and the slim prospects available in a slow, jobless recovery. This may be the first generation of Americans who cannot expect to fare as well as their parents.

The symptoms that plague the financial health of today’s young adults are most troubling for their depth: an almost complete absence of savings, large debt-to-income ratios and an economy where job security seems a thing of the past. Whereas young people starting out 30 or 40 years ago could count on vesting in a pension plan and developing a career all under the same roof, Generation Y will have to invest wisely and be willing to leap from job to job to secure a comfortable retirement.

Even the wisdom of whether and how much to invest in a college education is being called into question. In what the New York Times calls “an eerie echo of the mortgage crisis,” many recent college graduates are fledging into the real world with a six-figure albatross around their necks. With annual tuition at top universities now exceeding $50,000, the professional ambitions of tomorrow’s doctors, lawyers and scientists must be balanced with a serious reckoning of the competing costs of home and family. A study by the College Board reports that ten percent of people who graduated in 2007 and 2008 with student loans had outstanding debt of at least $40,000. Another organization estimates that nine times as many graduates face such burdens than was the case in 1996, even when adjusted for inflation.

But college debt is only one part of the picture. Consumer debt figures among Americans in their 20s are at record levels, and the oldest Gen Y-ers were able to enter into mortgages before the bottom fell out of the real estate market. A host of statistics shows the extent of debt and other long-term financial problems faced by people younger than 30:

• They average more than three credit accounts each, one in five of them has credit card debt of greater than $10,000, and 43 percent feel that their balances are too high
• A survey by the National Foundation for Credit Counseling (NFCC) in 2010 found that only 58 percent pay their monthly bills on time
• 60 percent cashed out their 401(k) retirement plans after losing a job
• According to the Bureau of Labor Statistics, the March 2010 national employment rate was 9.7 percent, nearly doubled by the 18.8 percent rate for workers younger than 25

It is far too easy to chock up this trend to generational irresponsibility and overconfidence. Regardless of what led an individual to the brink of financial ruin, everyone deserves a second chance and sympathy for the economic and social challenges they face during tough times. While cutting back on expenses, consolidating debts, renegotiating mortgages and accelerated repayment may work for some people, others will need to consider more aggressive strategies to overcome financial struggles that could otherwise last a lifetime.

Taking Charge by Declaring Bankruptcy

Regardless of the age of a particular debtor, bankruptcy may be the most practical and efficient way to escape a maddening spiral of debt and the overwhelming sense of helplessness that comes from having too little net income to get ahead. The federal bankruptcy code is a complex collection of laws designed for a wide variety of circumstances, but individual debtors (as opposed to businesses) will generally consider either Chapter 7 or Chapter 13 bankruptcy.

Chapter 7 bankruptcy is the preferred option for those who feel the need to wipe the slate clean immediately by discharging all eligible debt, including unsecured obligations such as credit card balances, medical bills, old landlords and repossessed cars. Student loan debt and back taxes are generally not dischargeable in bankruptcy. Secured debt such as a mortgage or vehicle loan is usually handled separately. This process is subject to eligibility requirements as determined by a means test, but the vast majority of people qualify to file because they are under the median income for their state.

Chapter 13 is a more complicated and expensive bankruptcy that takes three to five years to complete. It is most applicable to those of higher incomes with predictable, steady employment and income over the three to five year period of the plan. Chapter 13 can address certain mortgage and tax payment problems, but only if a person can afford an additional Chapter 13 payment on top of their regular monthly budget.

For many people, the most important benefit of the bankruptcy process is the automatic stay, which ceases all debt collection activity. This powerful legal action can almost immediately restore a sense of normalcy and balance to your life. Other debt relief options exist, from simple credit counseling to formal renegotiation and even consumer fraud actions. An experienced bankruptcy attorney can help you explore every option, then get you started on the road to financial recovery. For Generation Y debtors who have their entire lives ahead of them, this could be the first step toward long-term stability and prosperity.