Over the last two decades, precarious or insecure employment in Canada has increased by almost 50%, as 1 in 7 Canadians lives in poverty. Part-time work is becoming more common. Wages are not increasing fast enough to keep up with rising costs, resulting in higher personal debt levels. All of this explains why a bankruptcy study conducted by my firm found that low income and income insecurity are a much greater determinant now, as compared to previous year, of whether or not someone will have debt problems and file for insolvency.
In our findings, the average debtor in Ontario has an income that’s 41% lower than the median income in the province. What’s more, almost two-thirds (64%) of insolvent debtors have an after-tax household income in the bottom quartile of household earnings in Ontario.
Our study, called Joe Debtor, is conducted every two years to develop a profile of the average person who files for relief from debt. We then use this information to gain insight and knowledge as to why consumer insolvencies occur.
From my experience, one of the most important steps you can take to get debt relief is to seek help as soon as you start experiencing trouble. Our latest report, released in March 2017, reviewed the details of over 6,700 personal insolvencies in Ontario from January 1, 2015 to December 31, 2016. We compared the latest results with our previous Joe Debtor reports and concluded that there is a higher proportion of lower-income earners who are filing insolvency.
In addition, we found that it takes less debt to trigger insolvencies. The average insolvent debtor owed $52,634 in credit card and other unsecured debt, 7% less than two years earlier. Generally, someone files for bankruptcy when something catastrophic happens: they lose their job, become sick, or get a divorce. The result is less income available to repay existing debt. While this is still true, lower income levels can support less debt overall even when rates are low. Hence more low-income earners are declaring bankruptcy today than higher income earners.
Using Debt to Survive
To make ends meet, today’s debtor uses debt to make up for low or stagnating income. He uses debt to pay for everyday living expenses. Once debt accumulates, a below-average income makes it almost impossible to manage debt repayment. So, an unfortunate cycle begins.
The issue isn’t simply a lack of financial responsibility or discipline. Our average debtor is struggling with the rising cost of living and using credit to supplement a below-average income as:
- 41% of their income is spent on housing costs (that’s more than the recommended 35%)
- 31% is spent on personal and living expenses (above the recommended 20%)
- Just $302 is available each month to meet unsecured debt payments on an average debt d of $52,634.
- Interest costs alone amount to roughly $960 a month
- Overall debt load increases with every passing month
..senior debtors aged 60 and over now make up 12% of all insolvencies, continuing the growing trend that started back in 2011. To combat monthly income shortfalls, debtors turn to payday loans more than ever before. 1 in 4 insolvent debtors (25%) are using these loans. In fact, it’s actually becoming a scary trend among seniors.
Financially Vulnerable Risk Groups
There are at-risk households that are already experiencing financial distress before considering debt repayment. Four groups in particular are most vulnerable to insolvency:
- Young debtors, aged 18-29, account for 14% of all insolvency filings. This is up from 12% in our previous study in 2015. 6 in 10 young insolvent debtors say financial issues are the main cause of insolvency due to student debt and payday loan use.
- On the opposite side, senior debtors aged 60 and over now make up 12% of all insolvencies, continuing the growing trend that started back in 2011. 6 in 10 insolvent seniors live alone and struggle to repay debt, on top of a rising cost of living, all on a reduced and fixed income. Compared to our previous studies, they are more likely to be widowed, divorced, on a disability, and retired.
- Lone parents account for 17% of all insolvent debtors. Single parents are at a substantially higher risk of filing insolvency than dual-parent families as they are raising a family on an income that is, on average, 28% below that of two-parent households.
- Lastly, female debtors are almost twice as likely to have student debt and they are more than three times as likely to be lone parents.
Solutions to Achieving Debt Relief
The statistics certainly paint a dark picture and it’s an unfortunate reality that so many Canadians are having to face. But even with debt problems, there is hope for relief.
Generally, someone files for bankruptcy when something catastrophic happens: they lose their job, become sick, or get a divorce. From my experience, one of the most important steps you can take to get debt relief is to seek help as soon as you start experiencing trouble. It will allow you to have more options for paying down debt, like going to a credit counsellor for a debt management plan or obtaining a debt consolidation loan from your bank.
However, if you’re feeling overwhelmed with debt, you might not have to file for bankruptcy. Another effective and affordable debt relief solution is a consumer proposal. Despite our study showing that the average income among insolvents declined, more than half (55%) of all insolvent debtors in our study filed a consumer proposal as an alternative to bankruptcy to deal with their overwhelming debt levels.
A consumer proposal is a legally binding arrangement, filed with a Licensed Insolvency Trustee. You often repay less than what you owe and over a period of up to 5 years. The Trustee negotiates with your creditors on your behalf to come up with an affordable repayment plan for you.
Over the last two decades, precarious or insecure employment in Canada has increased by almost 50%, as 1 in 7 Canadians lives in poverty. For example, if you owe $50,000 in unsecured credit card debt and other loans, a consumer proposal could allow you to reduce your monthly payments on that total debt amount to just $300 a month, over 5 years, or $18,000 in total.
It is certainly a big saving from paying back the entire $50,000, where minimum payments alone can be $2,000. When you consider the monthly earnings of our average debtor at $2,377, $50,000 becomes a near-impossible debt to pay off.
Financial difficulties happen. And they happen more often than you think. But, if you’re struggling with debt, it’s a good idea to seek help as early as you can because there are solutions available to help you get back on track with your finances.
About J. Doug Hoyes
