Study: The face of bankruptcy in Canada

Ever wonder what the average Canadian who files for bankruptcy looks like? According to a February 2011 report by Hoyes Michalos & Associates, a Kitchener-based bankruptcy trustee, it's a 41-year old married man with four credit cards who owes $59,800, excluding his mortgage. That's about three and a half times more than the debt level of the average Canadian.


Doug Hoyes, a licensed bankruptcy trustee and co-founder of Hoyes Michalos & Associates, offers a detailed portrait of a bankrupt Canadian and explains how credit cards are contributing to such devastating debt. According to your report, "Joe Debtor: The Face of Bankruptcy," between 2008 and 2010, the average debt carried by those who file for bankruptcy increased 17 per cent. What factors are contributing to today's increased risk of insolvency?
Doug Hoyes: Based on our research, historically spending too much and taking on too much debt is still the greatest risk of insolvency. However, over the last two years, with the recession, job loss and reduced income [it] has become an increasing problem. 

In simple terms, debt isn't the only problem; the real problem is the inability to service the debt. If you have a job and can work overtime, you can earn enough to service your debts. However, when your income drops (such as when there is no overtime), you can't make your debt payments, and that increases the risk of insolvency. How are credit cards contributing to this debt?
Hoyes: Credit cards are the largest category of debt. The average person who filed bankruptcy or a consumer proposal with us in the last two years owed $24,390 on just over four credit cards. When you consider that interest rates on bank credit cards can be 19 per cent, and department store credit cards can be up to 25 per cent, it's easy to see how it becomes very difficult for the average person to service this level of credit card debt. Why are we seeing an increase in credit card debt?
Hoyes: Credit card is the easiest type of debt to access quickly.  If you lose your job, you can instantly get a cash advance on your credit cards, or use the credit cards to make purchases, so the natural inclination is to use credit cards to survive when you suffer an external shock (like job loss, medical problem or marriage break up). What impact might rising interest rates have on current debt loads?
Hoyes: If interest rates increase, it becomes even more difficult to service your debt. If you have a variable rate mortgage, each 1 per cent increase in interest rates on a $200,000 mortgage increases your mortgage payment by $100 per month. That's a significant increase if your income is not also increasing by $100 per month (after tax). What steps can Canadians take to avoid bankruptcy?
Hoyes: The most important step is to start reducing your debt now, before you suffer an external shock (like job loss, medical problem or marriage break up). Start with your highest interest rate debts first, because that will save you the most in interest. Pay off your department store credit cards, then your bank cards and then work on your lower interest rate debt (like mortgages).

If you already have more debt than you can handle, take action now, before it gets worse. The best solution to avoid bankruptcy may be a consumer proposal where you make a settlement with your creditors. A consumer proposal gives you one manageable monthly payment and eliminates your debt.

See related: Debt relief remedies for plastic-loving Canadians; 5 steps to take to avoid filing for bankruptcy

Published March 30, 2011

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