Is it always a bad idea to file bankruptcy at an early age?
July 29, 2013 2:47 PM   Subscribe

I'm 23 and thinking of filing bankruptcy. I have $16,000 + in debt - is this a bad idea?

I'm worried about the effect this will have on my future. Even though I'm in a lot of debt, only some of it (less thank 1k) appears on my credit report, and I have plans laid out for those so my credit will be fine. My credit is horrible now, but I monitor it/do the what-if-analysis/etc so I know that after I've paid that off I should be fine as far as getting approved for things go.

Despite that, I'm horribly in debt and my options to pay it off look dismal. I'm in school and can't graduate until I pay off $11,000 to my previous colleges; not student loan debt, but money the loans didn't cover and I wasn't able to pay off at the time. I've contacted both schools about settlement; one is a no-go, the other I'm hoping will remove the collection fee - but if not add another $6,000 to the total above.

The rest of it is just a various assortment of bills under $500 or less.

The problem is I feel like I'm frozen in time because of all this debt; at the moment I'm struggling just to stay afloat. I can't afford rent half the time, can barely afford utilities, and I'm making little to no progress paying any of this off. So on the up side, if I file I'll actually have some money left over instead of half going to essentials and the other half going to pay down debt. I feel like I'll have a "fresh start," not be nearly and stressed out and be able to continue my college career by actually being able to get my transcripts from those other 2 schools so I can graduate and move on.

On the other hand, I'm going to have horrible credit and then I'm going to have to rebuild my credit, and by the time I do that I'll be in my mid-thirties. I really want to be able to buy a car, a house, etc but I just don't see that happening if I file bankruptcy. Not to mention, and maybe this is silly, but in my social group I know a few people who filed bankruptcy around my age and it's highly looked down upon. I'm also worried about the dating field - This probably sounds horrible but I personally don't date people with horrible credit who aren't working on fixing it, because I've had 2 (!) situations where I've put everything in my name and then the person skipped out on paying or couldn't/wouldn't pay and I was left with a shitload of debt from that. I'm terrified of putting myself in that high-risk category.

Despite my concerns, I'm afraid that if I don't file I'm just signing myself up for years of kicking my heels, feeling stressed out over my debt load, being constantly broke/poor/borrowing money and not really building myself up/investing/starting a retirement savings or anything because all of my extra money is going toward paying down debt.

So, is it really horrible if I file bankruptcy at my age? Or does it seem like the best thing to do at this point? Has anyone done this and had things turn out OK? (Or not-so-OK?) thank you.
posted by Autumn to Work & Money (31 answers total) 2 users marked this as a favorite
Response by poster: I forgot to add that none of this is medical debt. Not sure if it matters but I see the qualifier in a lot of bankruptcy-related questions so just throwing it out there.
posted by Autumn at 2:51 PM on July 29, 2013

Actually, it sounds like those may actually be student loans. If you're negotiating with schools, they almost certainly are. The fact that they're not federal or weren't used to pay tuition doesn't actually matter. So bankruptcy might not even be an option for you.

Generally speaking though, several legal aid clinics with which I'm familiar have a $15k threshold before they'll even start talking to you about bankruptcy. Less than that isn't even worth their time, for two reasons. First, they don't generally have any problem coming up with adequate numbers of clients with far more than that. Second, much less than $15k and the balance of benefits isn't obviously a net positive. Sure, you're out of that debt, but your ability to borrow money for the next seven years is pretty much shot. You can do it, but it's expensive, and getting a mortgage will be pretty tough. You might just be better of paying it off somehow, and if you have any income beyond government benefits or the most modest of pensions, you can probably find a way of doing that. Besides with bills at $500 or less, they're not terribly likely to go after you. The filing fee and attorney costs would be more than they'd get out of you anyway.

To get a clear picture about your options and their upsides, you need to sit down with a credit counselor and/or bankruptcy attorney. They'll talk you through the various possibilities here and be able to give you good advice about which option is best for you, in your situation.
posted by valkyryn at 3:29 PM on July 29, 2013 [2 favorites]

Were you on a tuition payment plan or something at the time? IANAL but I had a friend who went through something similar, just whatever agreement they had signed with the school itself was deemed to be a student loan. I have no idea if their arrangement was like your arrangement, but it's something to be aware of. Just plain non-payment isn't, necessarily.

But take deep breaths. You're going to be okay. You won't date someone with horrible credit who isn't working on fixing it--well, good. You're not going to be that person, whether you can declare bankruptcy or not, you're going to be the person who's working on it, even if it's just baby steps.
posted by Sequence at 3:41 PM on July 29, 2013

I agree with valkyryn that the debt to the schools is student loan debt even if it was a living expense loan. I recommend a consultation with a bankruptcy attorney. Look for one on yelp that has recommendations that say things like "did not make me feel like I was immoral or should feel ashamed." That's generally a good sign. Also, they are generally required to tell you up front what attorneys' fees will consist of, and they will generally give you a consultation without charge.
posted by janey47 at 3:42 PM on July 29, 2013

Response by poster: Re: the school debt - I have no idea there. In one scenario, the school was something like $20,000 a semester and after financial aid $10,000 was left over to be paid out of pocket. My Mom was paying on it and stopped with $4000 left over. No idea if we signed anything, it was too long ago. The second one, I took summer classes which weren't covered by financial aid at all. Then the next semester, my Mom took out a Plus loan which she later returned; that left me with 7k in debt total, and they tacked on another 6k collection fee.

I'm hoping these are dischargable because they're the main reason for me filing. If not, I'm pretty much hopeless. :/
posted by Autumn at 3:47 PM on July 29, 2013

It's only $17,000. If you can't pay off $17,000 then you can't afford to buy a house or a car anyway, as either of them costs more than that. This isn't an argument for any particular course of action, I'm just saying that either way, if you can't pay this off and need to file bankruptcy, you're not really sacrificing anything, as you couldn't buy a house or a car regardless, and if you *can* afford to buy a car,then you can afford to pay off $17,000 instead, and save your credit. Sure, there's a delay there, but it's less than seven years.

I ruined my credit when I was young and although I never filed for bankruptcy, I couldn't have qualified to buy a house for seven years anyway because of all the negative stuff on my credit report that took seven years to expire. I now have very good credit. I bought a house when I was 30. What career path are you on? Do you realistically expect to be able to buy a house before 30 anyway? You can always buy a car for cash if you just need transportation. It may be old and basic, but you can get a working car for cheap.
posted by tylerkaraszewski at 3:59 PM on July 29, 2013 [3 favorites]

I literally went from AskMeFi to an RSS reader, where just about this first thing that appeared was this posting.
posted by megatherium at 4:01 PM on July 29, 2013

I filed bankruptcy in 2003 at the age of 30. I had about $15,000 in student loans, which made a portion of my debt.

A few things to consider. It's unclear whether the debt is dischargable, and I'm not an attorney so I won't speculate. Janey47 has it right - consult with a bankruptcy attorney. My initial consultation was $25. The total filing was about $1500 if I recall correctly.

My loans split into two groups - I had federal Stafford loans which were not dischargable, and private loans which were dischargable and no longer my legal responsibility. (There was a lot of confusion between these; suffice it to say if you have dischargable and non-dischargable debt with the same creditor, get ready for some Bizarre Crap to happen).

You're credit will take a hit. I got credit card offers within 3 months of the discharge - at 29.99% intereset. (You get offers because they know you can't file bankruptcy again for another 10 years). You know what though, you're young. My score was back up to average within about 3 years. 8 years after filing, we re-financed our mortgage and added me as a debtor without impact to the rates.

Seriously, talk to an attorney. IF you're not comfortable with him or her, find another. If they agree that it seems like it will help your situation, take it. It's a legal and ethical option available to you. Don't worry about the social group - they don't need to know.
posted by neilbert at 4:59 PM on July 29, 2013 [1 favorite]

You are going straight from "trying to do this on my own" to "bankruptcy" without trying anything in between. Start here, where you can search for *nonprofit* credit counselors. Try here, where you can search for a credit union that may offer consolidation loans, financial education, credit remediation programs, etc. Try here where you can ask about the best debt consolidation options you have in your area. You can do this.
posted by headnsouth at 5:01 PM on July 29, 2013 [6 favorites]

If these are student loans, you must prove that it would cause you undue hardship to repay the debt in order for bankruptcy to cancel them out.

"Discharge in Bankruptcy
This is not an automatic process—you must prove to the bankruptcy court that repaying your student loan would cause undue hardship.

If you file Chapter 7 or Chapter 13 bankruptcy, you may have your loan discharged in bankruptcy only if the bankruptcy court finds that repayment would impose undue hardship on you and your dependents. This must be decided in an adversary proceeding in bankruptcy court. Your creditors may be present to challenge the request. The court uses this three-part test to determine hardship:

If you are forced to repay the loan, you would not be able to maintain a minimal standard of living.
There is evidence that this hardship will continue for a significant portion of the loan repayment period.
You made good-faith efforts to repay the loan before filing bankruptcy (usually this means you have been in repayment for a minimum of five years).
Your loan will not be discharged if you are unable to satisfy any one of the three requirements. If your loan is discharged, you will not have to repay any portion of your loan, and all collection activity will stop. You also will regain eligibility for federal student aid if you had previously lost it."

posted by These Birds of a Feather at 5:02 PM on July 29, 2013

$17,000 is not one hell of a lot of money in the grand scheme of things. It's the price of an entry-level new car.

If you can't reduce the amount you owe, consolidate your loans and try to bring down the monthly payment.

Can you get another job? I know it sucks but you are young and if you work an extra job for a year you will be able to make a significant impact on your debts.
posted by KokuRyu at 5:18 PM on July 29, 2013

Wait -- this kind of sounds to me like these are unpaid tuition fees and not student loans at all? In which case the solution might well be to go to a credit union and try to get student loans and payment plans so that you can pay this amount over many years, as is the way of student loans.

At the very least you need to visit your various schools' financial aid offices and get a very clear accounting of who is owed what.
posted by Andrhia at 5:34 PM on July 29, 2013 [1 favorite]

While you're looking into whether bankruptcy will help or not, please look into some other things that can help now. Do your utilities have low-income/hardship help? I don't know where you are, but Washington state has a page of resources, so you know the kind of thing to look for where you are. If you're currently buying groceries, see if you qualify for food stamps and the food bank, and/or see if there are any hot meal programs you feel comfortable eating at (that you can get to at the time they serve -- often the hard part).

If you pay off this debt, finding ways to save as much of your money for that as you can will help. And if you're eating enough and not worrying about your rent, it'll be easier to pay this off. (I like the idea of taking a loan to pay it all back, so that it's in manageable chunks each month.) Good luck with this.
posted by Margalo Epps at 5:59 PM on July 29, 2013

You should consult a lawyer to ask whether bankruptcy will help with the school debts at all - will it actually force the schools to send the transcripts you want if you can get them discharged? Have you talked to the financial aid office at both schools or just the billing department?
posted by jacalata at 6:06 PM on July 29, 2013

I am a kind of legal person, but I am not a licensed attorney and I am definitely not your attorney. This is not legal advice, but rather some additional contextual information re: the comments above.

Generally speaking, unpaid tuition owing may or may not be considered a form on non-dischargeable student debt, depending on the facts, such as those regarding agreements in place between the school and the student, importantly whether or not there is any promissory note (such as might be signed under a tuition payment plan). A contract and an invoice alone is less likely to be seen by the bankruptcy court as non-dischargeable student debt.

Again speaking generally, once a debt is discharged the school may not refuse to send transcripts.

My sense is that valkyryn's comment at the top of the thread did a good job framing the larger context and my sense is also that the procedure he outlined is prudent.

If you'd like to provide your region or metro area, someone might be able to offer a more specific recommendation re: finding assistance in evaluating your situation.
posted by snuffleupagus at 7:17 PM on July 29, 2013

Bankruptcy isn't rarely a "should I or shouldn't I" situation. Either you have the capacity to pay your debts, or you don't. The time to file bankruptcy is when not filing bankruptcy is the worse path to take.
posted by gjc at 7:29 PM on July 29, 2013

Talk to a bankruptcy attorney. They'll talk to you for free, usually -- they know their potential clients are broke -- they'll only charge you if you decide to go ahead with it.

If you can discharge those debts, I say go for it. Bankruptcy was the best decision I ever made. It was a huge burden from my shoulders.
posted by empath at 8:03 PM on July 29, 2013 [1 favorite]

Autumn, I think the first thing you need to do is determine if you are in fact responsible for all of the debt and repayment. As your Mom was paying the debt originally and "stopped with $4000 left", that loan may have been in her name, not yours.

When you say your Mom had the PLUS loan "and then returned it" , do you mean that she paid off the loan but didn't pay any more toward your tuition, or that she passed the loan over to you? Because if she took out that Plus loan but did not pay it, you are not responsible for paying that debt (via the PLUS loan Federal Student Aid website):

As a parent borrower, can I transfer my loan to my child?
No, a Direct PLUS Loan made to a parent cannot be transferred to the child. You, the parent, are responsible for repaying the loan.

Also, PLUS loans can be deferred while you are a still at least a half-time student, though interest charges still accrue during the deferment.

The collection fee is outrageously high. Have you tried speaking with anyone, trying to negotiate that amount down? If you go bankrupt, they won't recoup that full amount anyway, so they might be amenable to working with you on that.

This all seems complicated enough that I think you really need to ask for copies of any promissary notes to determine what you actually owe and how it can be repaid, and then meet with a bankruptcy counselor, as others have already suggested.
posted by misha at 9:23 PM on July 29, 2013

Honestly, I don't think filing for bankruptcy is a very good idea.

First, you aren't sure about what your debt is - a lot of it may be student debt and not dischargeable.

Secondly, filing for bankruptcy may not actually get your transcripts released. The school can't send collections after you for the money you owe them, but they CAN refuse to give your transcripts to you/allow you to graduate until you pay the money, bankruptcy or not.

What you need to do:
- get a copy of your credit report, promissary notes, and all the other paperwork. Figure out how much you owe to who, why, and what kind of debt it is.
- negotiate the collection fees. They would prefer to negotiate than get nothing, so feel free to threaten them with mentions of bankruptcy. Similarly, bills from most places are used to dealing with this kind of thing: you get a better deal if you talk to them (payment plans, etc, rather than fees.)
- refinance/consolidate everything that isn't a student loan, especially to an option that allows deferment while a student.

At some point in the future, if you're still struggling, after you've got the paperwork and tried negotiating, then is when you think about bankruptcy. Do the intermediate steps first!
posted by Ashlyth at 4:42 AM on July 30, 2013

Here are the things you need to figure out:

1 - How much money is owed to other people, for what reasons, and by whom? (It sounds like you might owe some money, your mom might owe some money, etc. Also, the $6,000 collection fee doesn't sound accurate.)
2 - What amount of that money are you responsible for? (Again, if your mom took out a loan in her name, you are not responsible for it.)
3 - What is your income situation? How much money do you have each month after your necessary expenses (food, rent, etc.)?
4 - Can you consolidate all your loans together for simplicity, and perhaps for a better rate? This makes managing your payment much, much easier.
5 - Based on what you would owe each month, can you make that payment with your disposable income?
6 - If not (and even if you are) are you eligible for an income-based reduced monthly payment?

It might not feel like it, but you don't have very much debt. The average student loan debt amount is about $26,000 in the US. This is likely a very manageable situation for you, but you need to get all your information sorted out so you know what you're dealing with. That lack of clarity is going to cause more problems than the debt itself.
posted by NotMyselfRightNow at 5:45 AM on July 30, 2013

Response by poster: I had a consultation with a bankruptcy lawyer today; he said the school debt will discharge. But he also didn't know what a promissory note was, so hopefully he's right. I have a second consultation tomorrow because this guy costs $11000 (!). I've been trying to stay with more professional-seeming attorneys but at that cost I might end up going to horribly-designed-gimmicky-CALL NOW guy.

I'll update in six months or so when the process is over; unless one of the attorneys tells me the school debt can't be discharged, I'm going to give it a shot.
posted by Autumn at 12:54 PM on August 1, 2013

Wait, you're going to pay a lawyer $11k to try to help you get out of paying $16k? And the $11k guy doesn't know what a promisory note is? Please see a *nonprofit* credit counselor before you sign anything. Anyone else is going to take advantage of you.
posted by headnsouth at 1:14 PM on August 1, 2013

Response by poster: Oops, that should have said $1100. My bad! I actually did talk to a counselor that I found through MeFi around a week ago; he said because my expenses exceeded my income I would be ineligible for a plan until I fixed that.
posted by Autumn at 1:34 PM on August 1, 2013

Yeah, red alert, do not engage a bankruptcy attorney that doesn't know what a promissory note is. Find someone else.
posted by snuffleupagus at 4:34 PM on August 1, 2013

If your expenses exceed your income bankruptcy isn't going to help you.
posted by empath at 5:25 PM on August 1, 2013

That might have been too concise -- depending on your state, you're probably going to have to go through credit counseling again before you can declare bankruptcy.

If you successfully discharge your debts, you credit will be worthless. You will not be able to borrow more money to support your lifestyle. You are going to have to figure out how to live within your means, either by getting another job or spending less money.

Before you go to another consult, you should definitely figure out your budget.
posted by empath at 7:22 PM on August 1, 2013

Response by poster: I don't want to theadsit, but I had to update on this strange turn of events: The first guy I called had the most ethical, professional looking website, had tons of information about bankruptcy, etc. Yet he's the only lawyer of 3 that was willing to go through with it with the school charges. It was actually the lawyer with the horribly done unethical-looking website that straight-up said he wouldn't recommend it in my case, and that the debt was probably nondischargable and did I want more time to think about it. Then he said he also offers negotiations with creditors; so my plan right now is to have him give the creditors a call and say "Hey, if Autumn makes XYZ number of payments, can you ask the school to release her transcripts?"

Fingers crossed!
posted by Autumn at 11:23 AM on August 2, 2013

I'm a little concerned that the first guy took a closer look than the last, and saw something that made him think the BK could be worthwhile, whereas the last may see more advantage in selling you his credit counseling services than he does doing a BK for you. Did either one review any of your documents, or was this entirely verbal? Did either one explain their thinking as to possibility of the discharging the school debt (yea or nay)?
posted by snuffleupagus at 4:01 PM on August 2, 2013

Did any of the lawyers comment on the fact that bankruptcy may not get your transcripts released?

How much of their thinking regarding the school debts being dis-chargeable or not was explained (and what did they say?)

That said, the part where you try to negotiate a payment plan with your school to get your transcripts released sounds like an excellent plan.
posted by Ashlyth at 6:46 PM on August 4, 2013

Did any of the lawyers comment on the fact that bankruptcy may not get your transcripts released?

Ashlyth, you should probably cite some authority for that proposition. Otherwise (as a general principle) I'm fairly confident it's incorrect, at least absent some further qualification. Generally speaking, if the debt is in fact dischargeable, which is the underlying question, then the school would have no grounds to refuse to release the transcripts once the debt is discharged.
posted by snuffleupagus at 9:40 PM on August 4, 2013

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