Is it the economy that is driving the increase in bankruptcies and proposals across Canada?
The Office of the Superintendent of Bankruptcy recently released statistics showing that in April 2009, when compared with the same month in 2008, Canadian insolvencies increased by 32.2%!
Why the big increase? Is it due to the downturn in the economy, or is there something else that we need to be worried about? Clearly the economy has played a major role; to date we have experienced a major downturn in all economic indicators, including real GDP, and the unemployment rate, just to name a few.
Could it be due to the current state of our family finances? This topic has been overlooked in the press, but it is a driving force behind our economy at large. Unfortunately, due to the increased availability of credit over the last 50 years, we have turned from a society who had access to credit, to a society who is absolutely dependent on credit.
Every year, Roger Suave, a renowned statistician, analyzes the financial position of the typical household in The Current State of Family Finances for the Vanier Institute. In his most recent report on The State of Family Finances he has identified some alarming trends. :
- The average household debt is greater than $90,000.
- The total debt to disposable income ratio has increased to 140% for 2008.
- The ratio of consumer debt plus mortgage debt climbed to 127% of disposable income in 2008 – the Canadian rate is only 3% lower than the US rate. This ratio is now above what the US rate was in 2006, just before the bubble burst.
- Spending and debt have risen much faster than incomes – The average household income rose to $65,200 in 2008 and was up by 11.6% since 1990. Spending increased twice as fast (+24.4%) over the same period while total debt (+71%) increased more than six times faster than incomes.
- Annual savings are smaller and average net worth is also less.
The Certified General Accountants Association of Canada recently published the results of a survey they had conducted in order to shed light on the household debt of our Canadian Families.
Their key findings are very similar:
- Household debt reached a record high of $1.3 trillion in 2008 and these debts are primarily used to pay for consumption not assets.
- Canadian households are increasingly using money they have not earned (credit) to finance day-to-day living expenses.
- When asked for the main cause of their increasing debt, 58% identified day-to-day living expenses. This was up from 52% in 2007.
- 85% of Canadians with debt owe money on a credit card. Lines of credit and credit cards were the main sources of consumer debt.
- 84% of Canadians are worried about increased debt. 21% feel that they are not able to manage their debt load.
- 65% agreed that debt prevents them from being successfully prepared for retirement, education, leisure and travel, or financial security in unexpected circumstances.
- One third of Canadians do not save money. Historically, people start to save more when there is a downturn in the economy, but this time, there is no evidence of increased savings.
- 25% of Canadians would not be able to handle a $5000 emergency, even with credit cards and lines of credits, and 1 in 10 would be unable to deal with an unforeseen expense of $500.
- And most interesting of all – 78% of those surveyed said they would not change their saving patterns in order to build or rebuild their financial cushion.
If Canadian families are not willing to change, where will this pattern end?
Roger Suave clearly states that we are in a recession. He reminds us of how significantly families are impacted by the previous two recessions.
- Jobs lost in each recession: about 350,000 — After the 1990’s recession, it took five years for the number of jobs to return to the 1990 level.
- Average household incomes dropped in the last recession by $3,800 — Income levels did not recover for 10 years
- Record poverty rate reached in last recession – Rate in the nineties did not recover for 11 years
- Twice the number of Insolvencies
As you can see there is tremendous economic pressure. Many families are currently stressed, and many more families will likely be experiencing these same pressures in the near future. While we aren’t going to be able to change these trends overnight, we must first recognize how much economic pressure families are under and then do our part to reduce our family’s reliance on debt.
While many of us may be able to make some small revisions in the way we spend, others may be too far in to be able to do it themselves. If you can do it yourself, do it now. If you need help, meet with a credit counsellor or a licensed trustee to explore your options. Start now – we can improve the economy of the country by increasing the financial health of Canada’s families.
Written by Barton Goth, Trustee in Bankruptcy.