Insolvency is creeping up the income ladder

Study suggests growing problem for indebted Canadians, with ‘staggering’ acceleration among young people

Insolvency is creeping up the income ladder

Debt continues to be a pressing issue for Canadians, whose overall incomes aren’t rising fast enough to compensate for their heavy and growing load. And according to a new study, the growing debt-to-income problem is pushing a new segment of households over the financial brink.

According to the Joe Debtor Bankruptcy Study 2019 conducted by Hoyes, Michalos & Associates, the average household income observed among those filing a bankruptcy or consumer proposal rose 5.5% to $3,162 monthly after-tax. Median incomes, meanwhile, went up just 5.8% to $2,833.

“People are not getting a raise of this magnitude,” Doug Hoyes, Licensed Insolvency Trustee, said in a statement. “What is happening is that more prosperous households are now reaching the breaking point and tipping into insolvency.”

Insolvent debtors’ income increases lagged growth in household expenses, which advanced by 6.4% on average. After settling daily expenses, the average insolvent debtor was left with just $264 a month to put toward debt repayment, compared to $273 in 2018. That contributed to the 1.9% growth in average consumer debt balances, which amounted to $58,923 last year.

“More households have fewer funds available after paying for rising living costs to meet debt obligations,” said Ted Michalos, Licensed Insolvency Trustee, who emphasized that Canadians with high pre-existing debt are now faced with a debt repayment problem.

The study also revealed an unsettling rise in high-interest loans and credit vehicles. Last year, those carrying at least one loan from a high-cost payday lender, including larger installment loans and lines of credit, represented 39% of insolvent debtors, up two percentage points from 2018.

Insolvent payday loan users saw their average payday loan debt go up by 11.3%; high-interest financing loans, whose interest rates reportedly often fall between 39% and 49%, increased by 8.7%. The percentage of insolvent debtors filing insolvency with a shortfall on a financed vehicle also ticked up, from 10.2% in 2018 to 11.4% last year.

“The average insolvent debtor had 3.3% less available cash flow to repay interest costs on unsecured debt that rose by an estimated 8%,” Hoyes said, noting that overindebted consumers are also being hit with rising servicing costs as their credit profiles deteriorate.

“These financial pressures are affecting all ages,” added Michalos. “However, the pace of growth among young Canadians is staggering.”

The 2019 study revealed a near-8.5-month plunge in the average age of insolvent debtors, marking the youngest average age since the study’s inception in 2011. With the latest development, almost half of all insolvencies (47.1%) are represented by those under the age of 40.


Follow WP on FacebookLinkedIn and Twitter