5 Reasons Not to File for Bankruptcy in Your 20s

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 bills and financial responsibilities that may 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 declaring bankruptcy in your 20s may seem like an easy way to end the nightmare of debt, 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 filing for bankruptcy at 25 or thereabouts 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 are carrying some form of student loan debt. Nevertheless, filing bankruptcy won’t solve a thing if student loan debt is partially to blame for your financial woes.

In 2005, in Lockhart vs. United States, 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. Thus, not only will bankruptcy not wipe out your student loan; the government can also garnish up to 15% of your Social Security retirement benefits if you don’t pay.

2. You Could Be Neglecting the Real Issue

Most people in their 20s obtain that first “real” job and first “grown-up” apartment. In doing so they have to learn how to make the sacrifices required to live within their means. They are developing the skills and discipline required for becoming responsible, self-sufficient adults. Those who learn how to manage money during this time gain the ability 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 financial freedom offers, such as frequent vacations or early retirement.

If you find yourself struggling with managing your finances, with your debt snowballing into more and more debt, the real issue is not where you are but how you arrived there. It could be that you have been spending beyond your means—but there can be other causes, such as the widespread job losses brought on by the pandemic.

It’s important to stand back and figure out both how you got into your current predicament and what can be done to begin to climb out of it. Taking a second job for more income (when possible), debt consolidation, eliminating unnecessary spending, and paying down your debt little by little are all ways to help you readjust your finances and avert bankruptcy.

Your 20s may be the first time you’ve had to take full responsibility for your finances. Credit counseling from a legitimate credit advisor could help you think through these issues; the U.S. Dept. of Justice has a list of approved agencies for those considering bankruptcy. Use this time to learn how to manage your money so that you 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 do so when you approve a background check. If you plan to work in any position involving the handling of money—or even in nonfinancial roles within the insurance, finance, law, or academic industries—your credit will likely be one facet of your background check. A bankruptcy on your record could cause potential employers to deem you ineligible for a job.

Why does it matter? According to human resource expert Lisa Rosendahl, a deputy human resources officer at the U.S. Department of Veterans Affairs in St. Cloud., Minn., how a person manages their own personal finances is an indicator of how they may manage someone else’s.

4. You Could Become Homeless

Once you file bankruptcy, the option to buy a home could be off the table for seven to 10 years as well, though there are ways you can try to overcome the situation. More important, 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. 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

After declaring 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. 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. Fortunately, there are ways to repair your credit score 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, such as taking on additional jobs for extra income, paying down or consolidating your debts—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. Neither, however, is bankruptcy, and its repercussions may last longer than short-term financial struggles. Setting financial goals for your future will help keep bankruptcy at bay.