Are bankruptcies on the rise in Canada?

With Canadian consumer debt at an all-time high and now the highest per capita in the world, bankruptcies are rising before interest rates have risen.

According to a Huffington Post Canada report on April 29, 2016, titled “Canadian Consumer Insolvencies are Soaring, and Not Just in Alberta,” individual bankruptcies are up 6.3 per cent year over year across Canada in 2016.

And, as Rob Carrick of The Globe and Mail recently pointed out, it is not just McMansions causing Canadians to go further into debt. It is also that Canadians are buying more new cars than ever before. To make matters worse, he tweeted on May 12, the average car loan is now 74 months in duration.

Yup — the average car loan takes over six years to pay off, which means there are some loans shorter, but, alarmingly, some loans longer than six years. And unlike homes, autos have a relatively short life.

Let me toss in one more anecdote. A local car dealership had a special financing deal of 0 per cent (yes, zero per cent) on new cars and trucks. It was getting no takers and called a sample of customers who had bought from it but did not finance through it.

The dealership asked if the customers had financed the deal through their bank. All of them had done so. It asked if the customers had secured an interest rate of 0 per cent. They had not. It asked the customers why they had chosen bank financing. The answer was, “You want us to pay off the principal. The bank just wants us to pay the interest.”

So, there you have it. Many individual Canadians are using credit lines to purchase vehicles and pay the interest only. This means that five years after the purchase, most people want to replace their old car but yet still owe the original principal on the $X0,000 automobile, and since most people buy the most expensive auto they can afford, it means they have to incur additional debt to buy a replacement vehicle. Such credit lines are most often floating rates so these Canadians are exposing themselves to interest rate risk on top of the additional debt.

The only spot of good news in the Huffington Post article was that the number of accepted “consumer proposals,” whereby the consumer presents an acceptable payment plan to their creditor to avoid bankruptcy, rose by 13.2 per cent. This means that these people caught themselves before going over the edge into the abyss.

But only just.

Keep the conversation going

What are your concerns about rising Canadian consumer debt? Post a comment below.

Disclaimer

The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.

About the Author

Larry Short, CPA, CGA


Larry was born and raised in Carbonear, Newfoundland and Labrador. He attended Memorial University of Newfoundland and graduated in 1981 with a Bachelor of Commerce degree. He obtained his accounting designation in 1988 and began working as an investment advisor that same year. Over the years, Larry has achieved numerous professional designations: Certified Financial Planner®, Certified Investment Manager (CIM) and Portfolio Manager. Larry is a published author of In Short: Secrets to Make Your Dollars Grow (Doubleday 1998) and In Short: Successful Investing During Turbulent Times (2012). Larry’s wealth management practice is in its 28th year of business and continues with HollisWealth® in St. John’s, Newfoundland and Labrador.

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