Millennials are the poorest generation yet born in America according to the Federal Reserve. This generation of Americans, which includes those born from 1981-1996, has been cruelly saddled with more than $117,000 in non-mortgage debt on average.
What accounts for this debt burden? And can bankruptcy help those Millennial Michiganders in need of assistance?
This Article will discuss some of the financial issues plaguing Michigan Millennials—and some of the ways in which Chapter 7 or Chapter 13 bankruptcy can help ease the pressure.
Millennial Debt Burden: How Did This Happen?
Timing is everything. If you went to college in the mid-2000s, you are likely to owe 74% more than someone who attended college in the 1980s.
Student Loan Debt
The obvious answer is student loan debt. Student loan lenders, within that timeframe, became very sophisticated. They shoveled money at unwary college students with a much less sophisticated understanding of the loans they received, with little or no lending eligibility criteria. Student loans were (and still are) packaged and bundled into “financial aid” packages which seemed benign to excited 18-year-olds … And which contained an awful lot of tiny, tiny, fine print.
College admissions personnel and financial aid departments aided and abetted this swindle. Was your prospective major likely to land you a $100,000 per year job or a $30,000 per year job? Didn’t matter: they worked hard to make sure you graduated with six figures in student loan debt, Millennials.
Remember this when your university sends you those alumni fund-raising postcards. Consider sending them one back!
Worse, at the same time that the lending machine was gearing up for Millennials, college tuition and expenses skyrocketed. University administrators continue to be the source of the highest paid salaries on any campus, well above and beyond the half-employed adjunct professors teaching actual classes (part-time, with no benefits).
To put the cherry on top of the student loan sundae, in 2005, the lobbyists working for Sallie Mae and other major student loan servicers greased enough palms in Washington, DC to pass the odious BAPCPA “bankruptcy reform” legislation that made all student loans, public or private, non-dischargeable in bankruptcy.
Today, the average Millennial owes $126,993 in student loan debt.
Stagnant Job Markets
Job markets did not welcome college graduate Millennials with open arms, either. Especially for those Millennials who graduated in 2005-2008, at the height of the (most recent but not last) mortgage meltdown crisis, job prospects have been bleak at best.
Full-time workers in the US earn, on average, $54,000 per year. Not nearly enough to handle a six-figure student loan balance. Not enough for anything else that Millennials’ parents expected to be able to afford as responsible, working adults.
As the job market has further disintegrated into the Gig Economy offering new graduates in many cases only temporary positions, internships, or the promise of freedom and flexibility in exchange for per diem or per “gig” work, financial stability has become a thing of the past.
Employers want to pay as little as possible for as much as possible. This has always been true. For Millennials and Gen Z’ers after them, however, the Baby Boomer ideal of steady job-to-retirement life-plan, is a bad joke.
Picking the “right” college major has been no guarantee for Millennials, either.
Let’s look at the legal profession. For this purpose, ignore the “average” salary statistics that media outlets like U.S. News and World Report love to spout.
Only 5% of law students will end up in a “Big Law” firm paying new lawyers over six figures in salary … But that 5% throws reported averages way off. In Metro Detroit, if you’re lucky, as a new graduate, you might find an entry-level job as an attorney paying $45,000 per year. Couple that with six figures in student loan debt, and you see the problem.
Might as well skip college and become a plumber, right? Well, trade schools are not cheap and have gotten into the student loan game, too. Relegating yourself to permanent working class status is no guarantee of escaping the same debt issues as university graduates.
No job outside of government work will provide any Millennial an old school “defined benefit” pension plan any longer, either. Nearly all private sector retirement funds have been funneled into the hands of the hedge fund managers running Wall Street in the form of 401(k) and other mutual fund accounts.
Millennials largely understand that the stock market, which pretends to be an exercise in pure Capitalism, is entirely reliant upon the expectation of sporadic government bail-outs. They know that it is a shaky foundation upon which to lay retirement prospects.
Rising Housing Costs
Rising housing costs in Michigan and elsewhere in the US are well-publicized. They are not over-publicized, however.
Housing prices have outpaced inflation by 150% since 1970. This means that a house that was very affordable for Millennials’ Baby Boomer parents is unattainable now. Since 2000, home prices have grown 121% faster than the cost of general goods, according to the site linked above.
A home that would have cost your parents $23,900 in 1970 would cost a Millennial homebuyer $222,900 in 2010 ($408,100 today!), according to the US Census Bureau.
This staggering cost increase is a result of demand and inflation in terms of increased costs for building supplies. But also due to the “cheap” price of debt. Mortgage lenders deliberately drove mortgage interest rates down and pressured the Federal Reserve to keep it that way for years in order to market mortgage products and home equity loans to starry eyed buyers.
Publicizing homeownership as “the American Way,” America’s limited inventory of housing was soon more or less gone.
And, now, the Fed is kicking interest rates back up. Any of those Millennial homeowners in adjustable rate mortgages (ARMs) at this point will feel the burn.
The COVID-19 pandemic didn’t help Millennials in this regard, either.
According to M-Live, 1 in 4 Millennials describes themselves as “forever renters.”
Meanwhile, the rental alternative has not improved, either. The media is full of news articles reporting on high rental costs. See, for example, this CNBC article detailing a number of cities in which Millennials cannot afford a 1-bedroom rental apartment.
Credit Card Debt
What is the natural result of earning too little combined with inescapable student loan debt, on top of unaffordable housing costs and inflated goods prices?
Credit card debt.
67% of Millennials carry a credit card debt balance that they cannot pay off every month. The average amount owed is over $5,000. 1 in 4 of those Millennials who carry an unpayable balance owe more than $10,000, according to the site linked above.
As the Fed continues to raise interest rates, those unsecured credit card obligations become even more burdensome.
There are even other factors feeding Millennials’ debt burden as well, such as rising healthcare costs
So can a Michigan bankruptcy help a Millennial in debt?
How Bankruptcy Can Help Millennials
Bankruptcy is a Federal legal process that can either discharge debt outright or allow an indebted person to “reorganize” their debt. That is, to re-order which creditor is paid first vs. last and how much each creditor is paid.
Chapter 7 bankruptcy allows the discharge of debt outright, while Chapter 13 allows for the reorganization of the debt owed by Millennials.
For present purposes, it is important to know that, because bankruptcy operates with the force of Federal law, it “overrides” Michigan and other state court contractual obligations, loan promissory notes, mortgage contracts, and even court judgments.
It is also important to understand that some debts cannot be discharged in bankruptcy at all. This is not due to any contractual clause in any document you’ve signed, however. It is because the US Bankruptcy Code lists a few such debts. Child support obligations are a key example.
The US Bankruptcy Code is the Federal statute underpinning the bankruptcy process in the United States.
Other than those basic concepts, however, we will not describe the further differences in great detail in this Article. Visit our Detroit Bankruptcy Blog to review a great number of other posts on the basics of Chapter 7 and Chapter 13 bankruptcy.
We’ll start out this section of the Article by pointing out the debt problem for which bankruptcy is not a perfect solution.
We mean student loan debt, obviously.
Student Loan Non-Dischargeability
The US Bankruptcy Code, as noted above, includes all student loans, Federally guaranteed or private, among those non-dischargeable debts.
Thus, neither Chapter 7 nor Chapter 13 bankruptcy are fantastic solutions for the primary issue plaguing Millennials: student loan debt.
When you file for bankruptcy (either form), however, an injunction known as the Automatic Stay activates to prohibit nearly all debt collection activity. Including collections activity related to non-dischargeable student loan debt.
A Chapter 7 bankruptcy is typically a 4-month process only. Thus, while Chapter 7 will “shelter” you beneath the Automatic Stay for a short amount of time, it won’t do anything else to help with student loan debt.
You won’t have to pay your student loans for 4 months: but you’ll simply exit the Chapter 7 process in 4 months’ further arrears on the student loan debt—with 4 months of accrued interest, fees, and penalties now owed.
Chapter 13 has the same Automatic Stay effect, except that the process lasts for 3-5 years. And, as noted, it is a reorganization bankruptcy process rather than a liquidation, straight discharge process.
That means that, in Chapter 13, you pay some of what you owe to your creditors through a Federal Court-supervised (and enforced) payment plan. This 3-5 year payment plan allows you to pay important obligations first, such as mortgages and tax debt, while paying lower priority debts such as credit cards and medical bills.
In Chapter 13, those low priority, unsecured types of debts get whatever they get out of the payment plan and then are discharged in balance. Anything the creditor didn’t receive from the Chapter 13 plan is discharged just as in Chapter 7, that is.
Student loan debts, in Chapter 13, are unfortunately treated as low priority unsecured debts just like credit cards, even though they are non-dischargeable.
A Chapter 13 bankruptcy will shelter Millennials from student loan collections for up to 5 years and allow them to make some small payment (depending on the person’s income) toward those debts. But the accrued interest and penalties on the NON-discharged balance at the end of the Chapter 13 process can really snowball.
Congress needs to step in to rewrite the Bankruptcy Code to remove student loan debts from the list of non-dischargeable debts. Read my article on a Debtor Attorney’s Perspective on the present state of Student Loan’s in Bankruptcy.
Millennials should contact their Senators and Congressional Representatives to demand this action.
So What Can Bankruptcy Really Do to Help?
All of that said, while bankruptcy cannot help with housing or rental costs, it can help with all of the other debt sandbagging Millennials.
Credit card debt and medical debt, in particular, are easily discharged through either Chapter 7 or Chapter 13 bankruptcy.
This may offer enormous relief to that large number of Millennials dealing with $10,000 or more in credit card debt.
Discharging this unsecured debt is not useful only for its own sake, however. With a limited income, getting rid of dischargeable debt, even if it does not rid of you student loan baggage, will increase the available income you have to pay student loans or at least enter into a payment plan agreement with student loan servicers.
Or, god forbid, it will allow you to pay rent or a mortgage while dealing with the student loan debt.
How Bankruptcy Can Help Millennials: The Bottom Line
The bottom line is that, for Millennials trapped in debt, it is worth having a conversation about the benefits or utility of a Chapter 7 or Chapter 13 bankruptcy process with an experienced attorney.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has successfully represented Metro Detroit Chapter 7 and Chapter 13 clients for over 30 years.
Contact us now to schedule your free initial consultation.