Number of Insolvent Households in Canada Grew 9.5% Despite Boom Time
Mon, October 25, 2021

Number of Insolvent Households in Canada Grew 9.5% Despite Boom Time

It was mostly good news for Canada’s economy last year but the number of insolvent households in the country still grew by 9.5%, according to the Office of the Superintendent of Bankruptcy (OSB) / Photo by: shankar s. via Wikimedia Commons

 

It was mostly good news for Canada’s economy last year but the number of insolvent households in the country still grew by 9.5%, according to the Office of the Superintendent of Bankruptcy (OSB) Canada, which is the federal office responsible for the administration of Canada’s Bankruptcy and Insolvency Act.

Personal Insolvencies in Canada

The OSB data revealed that 137,178 Canadians filed for modified repayment terms with creditors or bankruptcy last year, indicating a 9.5% increase compared to the number of insolvent households in 2019.  The office said that it is the highest number of personal insolvencies and the quickest yearly increase in the country since 2009 with 151,712 bankruptcy filings. This means that 375 people per day in 2019 sought debt restructuring or financial protection in the country.

Canadian Association of Insolvency and Restructuring Professionals’ board member Andre Bolduc said that the accelerating insolvency rate and the increase in the number of consumer insolvencies in Canada is a sign of a bigger problem. “Many who have amassed unmanageable debt have no path out,” Bolduc said via Canadian news provider Ottawa Citizen.

OSB also showed that Canadian consumers are not the only ones going broke during good economic times as businesses have also shown signs of being under the same pressure. Debt reconstructing proposals and business insolvencies increased to 2.8% last year, the first yearly increase since 2001. Such was during the dot-com bust, a period when hundreds of internet-based firms went bankrupt. The companies that survived during such a historic period lost a big amount of stock valuation.

The office said that the 2019 pressure to Canadian businesses was driven by the increase in failures in the oil and gas and mining industries. There were 42 companies in the said sectors that went under duress in 2019 compared with only 24 firms in 2018. Financial duress describes an environment when business managers are making difficult decisions under stress and their choices are usually made outside of their standard financial and operating conditions. For instance, so they can keep their firm afloat, they may sell their assets even if it would disrupt their business in some way.

The OSB data revealed that 137,178 Canadians filed for modified repayment terms with creditors or bankruptcy last year, indicating a 9.5% increase compared to the number of insolvent households in 2019 / Photo by: Tony Webster via Wikimedia Commons

 

Good Economic Times in 2019

Normally, when proposals and bankruptcies are high, it is because of sluggish growth in the economy. When asset prices are declining and the unemployment rate rising because of the declining, flat, or slow economic growth, many consumers in the country will be in trouble. However, Canada’s economy put on a strong show last year. It provided 320,000 jobs to people and the country’s stock market also reached a record high. So, what caused the increase in the number of insolvent households? The OSB data shows that it is debt and interest rates. Bolduc said in an interview with HuffPost Canada that after the 2009 global financial crisis, governments of different countries flooded their economies with money. To keep their economies going, they also lowered the interest rates. This strategy worked for a while. One can even say that consumer spending helps the economy keep going after experiencing a financial crisis. Yet, since money was also so cheap, people tend to amass a lot of personal debt and businesses are likewise encouraged to borrow.

Canada’s GDP per Capita

GDP per capita is a good measurement for the country’s standard of living. It is derived by dividing the country’s gross domestic product by its total population. Canada’s GDP per capita in 2000 was at $37,446.00 and changed in the years that followed: 2001 ($36,884.00), 2002 ($37,037.00), 2004 ($39,211.00), 2006 ($41,678.00), 2009 (39,214.00), 2010 ($40,618.00), 2013 (41,816.00), 2015 ($42,844.00), and 2016 ($42,969.00). This is according to Our World in Data, a scientific online publication that focuses on large global problems.

In another survey in 2015 involving 1,020 respondents in Canada, they were asked by database company Statista the situation they would rather be in. It was found that 73% of Canadians preferred to be in a situation where someone owed them money and they did not want to ask for it, rather than knowing that they owed someone money and kept forgetting about paying it back (25%).

Where Most Canadians Spend Most of Their Money

Canadian government agency Statistics Canada also showed that the average expenditure per household in Canada was $86,070 in 2017. The summary-level categories of such amount are as follows: food purchased from stores ($5,934), food purchased from restaurants ($2,593), shelter ($18,637), water, fuel, and electricity for principal accommodation ($2,484), household operations ($4,827), communications ($2,399), household furnishings and equipment ($2,314), clothing and accessories ($3,430), transportation ($12,707),  healthcare ($2,579), personal care ($1,300), recreation equipment and related services ($1,036), home entertainment and equipment and services ($196), recreation services ($2,171), education ($1,777), tobacco products and alcoholic beverages ($1,497), games of chance ($200), income taxes ($14,993), personal insurance payments and pension contributions ($5,137), and gifts of money, support payments, and charitable contributions ($2,218).

Canadians Gave In to the Temptation of Cheap Credit

A cheap credit or a credit with low-interest rate tempts citizens of most developed nations but Canadians have given in to such temptation more compared to people from other countries. The OSB data even reveals that debt has increased by 32.5% compared to the average 13.8% in other developed countries. For example, the EU and the US cut back their borrowing for the last couple of years after the global financial crisis. This makes their debt lower compared to Canada. The Bank of Canada also introduced small interest rate hikes in 2017 and 2018, making Canadians more vulnerable to borrowing.

Bolduc also attributed the increase in insolvencies to the fact that many people delay seeking financial help and they would struggle for their debt for years. Bolduc believes that the situation, for now, is not a full-blown economic crisis.

Bolduc's statement and OSB's data show that Canadians are not yet losing everything but are struggling to cover the money they borrowed. To reduce their debt, they can stop creating more debt, start creating emergency funding, ask for a lower interest rate from their creditor, and cash out their life insurance policy, if necessary. They can likewise seek consumer credit counseling, get help from their family and friends, and sell some of their assets. The process of bouncing back from bankruptcy may not be easy but they can gradually work their way toward rebuilding their credit score.

A cheap credit or a credit with low-interest rate tempts citizens of most developed nations but Canadians have given in to such temptation more compared to people from other countries / Photo by: Hloom Templates via Flickr