Canadian consumer insolvencies on the rise

Canadians are in debt, and it’s only getting more difficult to climb out of the hole.

Driving the news: Consumer insolvencies increased by 16% between November 2021 and November 2022, with almost 9,500 people unable to pay their debts, according to Statistics Canada

  • Financial experts describe insolvency as the inability to repay creditors on time. A common sign of insolvency: Taking on more debt to make interest payments on existing debt.

Why it’s happening: Canadians currently carry a large debt load, spending $1.83 for every dollar they earn, making them more vulnerable to the uptick in interest rates.

  • When the Bank of Canada raises rates, lenders raise their rates for consumers as well, driving up the cost of borrowing money (including mortgages and any credit card debt you don’t pay in full).

  • The prime lending rate, which is what big financial institutions use to set the interest rates they charge you, is now at 6.45%, up from 2.45% in March of 2022.

Why it matters: One possible outcome of insolvency is bankruptcy, which will clear most of your debts—but it kills your credit score, and you’ll be forced to liquidate most of your assets. You do get to start over with a “clean slate,” though. 

  • To avoid declaring the big B, more Canadians are turning to consumer proposals, an option that allows you to keep your assets.

  • A consumer proposal is a legal settlement agreement with creditors where the debtor agrees on a plan to pay back what they owe over time.
  • The Canadian Association of Insolvency and Restructuring Professionals (CAIRP) advises that if you’re depleting your savings, living off credit or getting collections calls, it might be time to reach out to a government-regulated professional to discuss your options.

Bottom line: We’re in the midst of a “perfect storm,” economically speaking, but the sooner you start bailing out your boat, the better chance you’ve got of staying afloat.