Even before the coronavirus pandemic hit, there were mounting concerns about personal debt levels in Canada. While borrowing money can be part of good financial management, debt becomes a problem when it starts piling up and outpacing income.
So, what does the debt situation look like in Canada? The Canadian household debt load has been steadily rising since the early 1990s. Debt levels have spiked more recently, due largely to lower interest rates. This has been especially reflected in high levels of mortgage borrowing. What’s important to note, though, is the ratio of borrowing to household income. A recent report showed that household debt is at $1.76 for $1 of disposable income. Furthermore, Canadians are spending a record 14.96% of their income on debt payments, half of which is being directed towards interest.
Insolvencies are also on the rise among Canadians, particularly among individuals. According to Statistics Canada, consumer insolvencies increased by 13.4% in the past calendar year. It may come as a surprise, then, that the number of bankruptcies have actually decreased by 1.2% during this same period. This downward trend in bankruptcies started in 2009 and can mostly be attributed to more favourable global economic conditions.
But there’s another reason why bankruptcies have been continuing to decline: consumer proposals. More and more Canadians are pursuing consumer proposals over bankruptcy to deal with insurmountable debt. In fact, consumer proposals increased by 17.9% in the past calendar year, coming to a total of 83,703.
Why are More Canadians Choosing Consumer Proposals?
Both consumer proposals and bankruptcy result from insolvency, yet consumer proposals enable individuals to keep their assets, more quickly pay off debt and do less harm to their credit score. This is often appealing to those with higher incomes and with valuable assets. The bankruptcy route can result in surplus income payments and loss of assets.
A consumer proposal is a debt relief program authorized by the government of Canada available to individuals looking to avoid bankruptcy. A Licensed Insolvency Trustee (LIT) works on an individual’s behalf to negotiate with the individual’s creditors a percentage of debts to be paid. This amount is distributed over monthly payments usually spread over a period of five years. You can see why this may be an attractive option for many overburdened by debt.
Situations of insolvency, however, still cost enormous amounts of stress, time and damage to your credit rating. In a climate of alarming debt rates and worrisome debt-to-income ratios – and significant societal consumer pressures – how does one avoid hitting the red?
How to Avoid the Downward Debt Spiral
It’s important to approach financial trends, including the spending and borrowing happening around you, with a healthy amount of caution.
For example, low interest rates may make a mortgage suddenly possible, but does that mean it makes sense for you to buy that house? Make sure to be aware of what percentage of your household income will go towards mortgage payments and interest and how long you will be paying your mortgage. And continually analyze your spending habits. Are you spending an appropriate percentage of your income on rent or mortgage payments, loans payments and personal expenses? Is there enough left over for your slush fund and your retirement savings?
Even if you don’t think you’re in a financially precarious place, it’s a really good idea to seek some solid financial planning advice. Maybe you’re doing ok, but some ongoing habits – or an unexpected major event, like we’re currently seeing with COVID-19 – could put you in a tough spot.
If You Find Yourself in Consumer Proposal…
As we explored above, insolvency and consumer proposals happen to many Canadians. And, they can happen to anyone – even those with high incomes and those who are careful with their money. Major events can happen that cause a cascade of financial duress, and eventually, unmanageable debt.
If this is you, there is good reason to foresee a better financial future. You can take action to boost your credit, save for the future and improve your financial situation right away. Doing so will maximize your short- and long-term financial health and help you move on with your life.
Make Credit Climbing Your Goal
Your credit score is like your financial report card and affords you the opportunity to qualify for loans, credit cards, a house rental and sometimes even a job. The credit scores among those in consumer proposal, unfortunately, drop very low. Nevertheless, it’s especially important to make improving your credit score a top priority during consumer proposal. By building a positive payment history during your consumer proposal, you’ll be poised to maximize your credit score when you complete your proposal.
It’s important for everyone, and particularly those in proposal mode, to keep on top of their bill payments, including to your proposal. Ensure, as well, that you avoid making out cheques with insufficient funds. It’s also a good practice to monitor your credit score and rating on an ongoing basis. This way, you can detect upward and downward movements in your score, as well as identify any possible errors. You can obtain a free copy of your credit report once a year from Equifax and TransUnion, Canada’s two credit bureaus. Canadian companies such as Mogo, Credit Karma, and Borrowell can also send you free monthly updates on your credit score and rating.
Consider a Credit Accelerator Program
If you’re eager to pay off your consumer proposal in less than five years and are interested in improving your credit and building your savings, consider the Climb Accelerator Plan.
The plan is geared towards helping those in consumer proposal boost their credit rating, while building up some savings that can be used to pay off your proposal sooner. Climb works with you to develop an early repayment goal customized to your budget, payment schedule and financial goals. You make pre-authorized weekly, biweekly or monthly payments that Climb reports to Equifax and TransUnion. In the meantime, your money is stored in a secure account and then returned to you as a lump sum at the end of your term.
With consumer proposals steadily on the rise in Canada, and more on the horizon thanks to the devastating financial impacts of the coronavirus pandemic, it’s important to be prepared and know your options. A consumer proposal is a serious situation, but it’s one you can recover from with the right actions.
Still have questions? Reach out today and our team would be happy to provide you with a free credit consultation.