Canadian insolvencies are on pace to grow around 10 per cent this year, according to data from insolvency trustee Hoyes, Michalos & Associates.
“More than 8 out of every 10 people who file insolvency are working; it’s not unemployment that directly causes most insolvencies, it’s cash flow.” Doug Hoyes, co-founder of Hoyes, Michalos & Associates, told Yahoo Finance Canada.
“The issue is that expenses are rising faster than income, so people use debt to make ends meet.”
Despite a tight labour market, wages rose around 2.5 per cent in 2019. But that doesn’t keep up with food prices, which rose around 3.5 per cent.
It also doesn’t keep up with rising rent costs of about 9 per cent, which is where 40 per cent of Hoyes’s clients’ income goes. He says roughly 95 per cent who file for insolvency are renters.
A typical client has a net income of around $2,500 a month, but almost $50,000 in unsecured debt.
“Personal loans, credit cards, taxes and student loans are a big cause of financial trouble,” said Hoyes.
“When you have a lot of debt, you have bruised credit or are maxed out with the bank, people turn to higher interest lenders, like payday loans and low-credit financing companies, and that causes a lot of trouble.”
For people who don’t own a home or have too much debt to realistically manage alone, Hoyes suggests a consumer proposal as a path to relief.
“In a consumer proposal, your creditors realize you can’t pay them in full, but they don’t want you to go bankrupt, so they are often willing to accept a settlement for less than the full amount owing, with no interest,” he said.
“It’s a win-win for everyone; the bank gets something, and you have one manageable payment each month to deal with all of your debts.”
Hoyes says many people don’t realize that government debt, including income tax, can be wiped out in a consumer proposal.
Why wages aren’t going up
Benjamin Tal, deputy chief economist at CIBC World Markets, says there are many reasons wage growth hasn’t been strong.
He says there’s a mismatch between people and jobs, automation is reducing bargaining power, and the share of older workers (50-60) is rising at the fastest rate ever.
“People do not retire as quickly as in the past, but they reduce the number of hours they work,” Tal told Yahoo Finance Canada.
“So employment is still rising, but the number of hours is not rising as quickly, which is disinflationary.”
Tal said older workers tend not to ask for raises. They also miss out on bigger paydays by not jumping ship to other employers. When people retire, they are replaced by younger workers who get paid less.
Preparing for the worst
A new paper by the National Bureau of Economic Research in the U.S. proposes employers should think about offering workplace rainy day funds as a way to keep up with unexpected events like falling behind on debt. It would also prevent raiding retirement funds.
Rubina Ahmed-Haq, personal finance expert, says it’s a great idea, but since most employers don’t offer it, it’s important to sock away some money when times are good. She suggests aiming for enough to get you through three months.
“Find out how much three months of expenses are by writing everything down that you spend, including bills and mortgage,” she told Yahoo Finance Canada
“Your life could cost $2,500 a month or $15,000, but you won’t know unless you add it up first.”
Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.