Is the recession over in Canada? Are Canadians, on average, in better financial shape than they were during the height of the collapse? A look at the personal bankruptcy statistics in Canada would seem to say so. The Office of the Superintendent of Bankruptcy recently reported that total bankruptcy and consumer proposal filings in Canada fell for the third year in a row.
But the real question is: are we more financially secure today or are we on the precipice of financial disaster? We should not read to much into the declining trend in Canadian bankruptcies. While total personal bankruptcies may be on the decline in Canada, for now, the fundamental fact is too many Canadians carry too much debt.
While Canadian bankruptcies have declined significantly since peaking in 2009, overall debt has continued to escalate. The average household debt-to-income ratio rose from 149% in 2009 to 161% in the third quarter of 2012. So why might bankruptcies be on the decline if debt is increasing? One of the driving factors is low interest rates. The scary truth is, many Canadians are able to keep up with their debt payments today only because their cost of servicing that debt (the interest cost) is so low. The average debt service ratio in Canada has dropped significantly over the past 3 years and has stabilized at around 7.4%. But what happens when interest rates begin to rise? How many Canadians will find themselves of a downward spiral, finding that bankruptcy will be in their future?
Having debts that you cannot repay puts the financial security of yourself and your family at risk. It is an illusion that only those who’s personal spending habits are excessively out of control file for bankruptcy in Canada. In fact what often causes someone to have to declare bankruptcy is not just having overwhelming debt, but finding that their personal financial situation has suddenly changed for the worse. Perhaps a job loss, large unexpected repair bill, divorce or other unforeseen catastrophic life event. Whatever the cause, in most cases, these individuals did not see the crisis coming and were not prepared for it.
So while the fact that bankruptcy in Canada is currently on a downward trend is good news, Canadians still need to lower their debt levels or these statistics will surely reverse.