No, it’s not because of Klarna (though we should be worried about it all the same…) No, it’s not really because we all want avocados now and to hell with the cost. It’s not even because we’re all trapped in the gig economy…the causes behind a ten-fold rise in young people (incorrectly described as ‘millennials’) going bankrupt are varied and complex. Unpacking them will not only will help us understand young people better, but also get to the root of the our seemingly never-ending household debt crisis
Are more millennials going bankrupt today than ever before? It’s hard to escape that conclusion after reading several recent reports about a spike in young people declaring bankruptcy.
Nearly 2000 people aged between 18 and 25 declared bankruptcy between April and June this year, compared to just 208 at the beginning of 2016. Under 25s now make up 6.5 per cent of all bankruptcies compared to 1 per cent three years ago, according to data from the Insolvency Service collected by accountancy firm RSM. The figures cover bankruptcies, debt relief orders and IVAs combined.
It’s odd, to say the least, that some teenagers are amassing such huge debts that they – or their creditors – feel they have no choice but to push the B button. Bankruptcy is seldom the first course of action for those in troublesome debt. But if you owe more than £5000, your lenders might give you no choice.
Bankruptcy – an extreme last resort
Every bankruptcy is a tragedy, but it’s particularly wretched when you’re just starting out in life. Besides the actual upfront cost of going bankrupt itself – £680 – it overshadows your finances for years afterwards, even though the state of bankruptcy only lasts 12 months. You’ll be required to pay back as much of your debt as possible for 3 years, while also being (understandably) restricted from taking out any more for up to 6 years (which is how long a bankruptcy stays on your credit file). You might be kicked out by your landlord, barred from doing certain jobs and the information will be published publicly. Bankruptcy is learning about debt in the worst way possible.
So we’re in agreement that this is worrying, and that 2000 bankrupt young people is 2000 too many. The question is: why is it happening? How should we interpret the seemingly high number of young people opting for this extreme last resort?
Alex Pilmoor of RSM was quick to diagnose the cause for The Telegraph:
“In this climate of low interest rates and relatively easy access to credit, it is entirely feasible that young people without financial experience or literacy may be more susceptible to the temptations of easy money.
“We’ve also seen an increase in more flexible – but less secure – ways of working. The rise of the gig economy and zero-hours contracts have placed greater importance on the need to budget effectively. This could be proving a challenge for Generation Z.”
Mr Pilmoor is right to highlight debt as a factor. But naivety and lack of self-control are not the only – or even main – drivers. Yes, it’s totally possible that some young people could have easily survived and thrived within their means but chose not to. Ultimately, young people at age 18 are adults who need to wise up to how the world actually works, rather than what they’d love it to be. Part of that is understanding that credit comes with strings attached, and those strings will snap off and hurt you unless you keep a tight grip on them.
But we also have to look at the wider economic picture. Recently, it was revealed that former PM Tony Blair’s promise to get half of young people attending university has finally been achieved – but at what cost?
The proliferation of universities as businesses which simply take young people’s money and promise not to trigger them along the way…that’s the cost. Experts agree that this has devalued degrees right across the board, meaning that very few courses today can guarantee well-paid jobs with steady progression at the end of it all.
Learn it till you earn it…
Okay, so an education isn’t just about securing a high salary. And it isn’t fair to lay the blame for young people’s labour and financial problems solely at the doors of universities. The labour market has also changed substantially in the past decade, becoming far tighter in many fields and favouring those who can learn new skills (especially in the softer arena), be entrepreneurial and master technology.
Silver lining alert: I do feel the younger end of Generation Z will be far more prepared for this new world of work compared to older Zoomers and millennials. Teenagers will expect a tough jobs market defined by both the threat and opportunity posed by technology. But my generation? We really were led to believe by babyboomer parents, mostly ecstatic about how things turned out for them, that things would be a lot simpler and better than this.
We graduated into a world of rising costs for – well, just about everything – but especially for a basic roof over our heads, something our parents could once take for granted. So yes, forgive us if credit becomes a bit like those pathetic Hello Kitty plasters for all these open wounds.
Give us some credit
But with respect to the Telegraph (particularly to the obviously lovely Marianna Hunt), I just don’t think Klarna is widespread or established enough to be cited as a major contributor to young people’s debt problems – yet.
It’s more likely that payday loans are still having too much sway over younger borrowers. The fee cap of 0.8 per cent per day, introduced by the regulator in 2015, has certainly shrunk the sector but many pockets of the industry appear to be alive and well, possibly because they are blatantly circumventing the fee cap and still requiring people to pay back huge multiples of what they originally borrowed. It’s easy to see how this quickly leads to financial chaos – i.e. the perfect conditions for declaring bankuptcy.
But at a more chronic level, there’s the death by a thousand cuts caused by credit cards. The credit industry doesn’t make it easy for young people to find their feet when it comes to responsible borrowing. The active targeting of young people with mailshots and online adverts for credit builder cards gives the impression that borrowing is simpler and more affordable than it really is. Advertised rates versus real rates, automatic credit increases, minimum repayment terms…all conspire to get people of all ages locked in the borrowing habit for a very, very long time. There are no obvious incentives to pay off more than the minimum, no proper explanation about the consequences of failing to do so.
Debt, when used carefully and sparingly, can help you to progress in life. But today’s debt market isn’t helping young people move on in their lives – it’s keeping them trapped in a state of dependency and often quiet despair. We need to tackle this crisis top to bottom, starting with actual financial education and finishing up with crystal clear credit card statements that make the cost of long-term borrowing painfully clear.
Because this has gone on long enough.
What do you think is the main cause of increasing millennial and gen Z bankruptcies? Let me know what you think below or tweet me – @ionayoungmoney.