Consumer insolvency in Canada: why is it on the increase?

Posted on 2 April 2024

Written by Chris Galea

In recent years, Canada has witnessed a trend due to a lapse in financial stability for debtors: an increase in consumer insolvency cases. From filing bankruptcy to consumer proposals, more individuals are finding themselves overwhelmed by debt and seeking relief through formal insolvency processes. At Spergel, we believe it’s essential to understand the factors contributing to this rise to better support individuals facing financial challenges. We’re committed to shedding light on this issue to better support individuals facing financial challenges. In this article, we’ll explore some of the key reasons behind the increase in consumer credit and debt, and how this is impacting consumer insolvency in Canada. We’ll also offer insights into how individuals can best navigate these challenges.

Is consumer insolvency on the rise in Canada?

Yes – in fact, consumer insolvencies for the year ending January 31, 2024 increased by 22.4% compared to the year ending January 31, 2023. This isn’t even an increase – it’s a rapid rise in the amount of Canadians becoming insolvent. A combination of a rising cost of living, increasing interest rates, and recovery from the pandemic are likely contributing to this increase, with more individuals struggling to keep up with rising prices and taking on more consumer debt in order to make ends meet. Although this debt may be intended as a temporary measure, it often ends up becoming unmanageable, with more and more Canadians finding themselves in a debt trap. Revolving credit – including credit card debt – is more popular than ever, often because savings have been depleted during the pandemic for various reasons. It’s a similar picture for business insolvencies, too, particularly as companies are hit by an end to pandemic support, higher interest rates, and reduced consumer spending. What’s more, the CRA are now demanding Canada Emergency Business Account (CEBA) loans to be repaid, which is putting many Canadians in a difficult position.

Why is there an increase in consumer insolvency in Canada?

There are a number of reasons why we’ve seen an increase in consumer insolvency in Canada in recent years:

Economic uncertainty

A significant factor driving the rise in consumer insolvency in Canada is economic uncertainty, particularly exacerbated by the pandemic. The pandemic has led to widespread job losses, business closures, and financial instability for many Canadians. Despite government support programs aimed at mitigating these impacts, including the Canada Emergency Response Benefit (CERB), many individuals have still found themselves struggling to make ends meet. For those who lost their primary source of income or faced reduced hours, keeping up with debt payments became increasingly challenging, ultimately leading to insolvency for some.

High levels of household debt

Canada has consistently ranked among the countries with the highest levels of household debt relative to income. Easy access to credit, coupled with low-interest rates, has fueled a culture of borrowing, leaving many Canadians with significant debt burdens. While debt can be manageable during periods of economic stability, unexpected disruptions such as job loss or illness can quickly turn manageable debt into financial hardship. As a result, more individuals are turning to insolvency as a means of addressing their debt obligations and regaining financial stability.

Rising cost of living

The cost of living in Canada, particularly in major cities like Toronto and Vancouver, has been steadily rising in recent years. From housing and healthcare to education and transportation, essential expenses continue to outpace income growth for many Canadians. As a result, individuals and families are forced to stretch their budgets to cover basic necessities, often relying on credit to bridge the gap between income and expenses. Over time, this reliance on credit can lead to unsustainable debt levels, contributing to the increase in consumer insolvency cases.

Stigma surrounding financial hardship

Despite efforts to promote financial literacy (including Financial Literacy Month in November) and reduce the stigma surrounding financial hardship, many Canadians still feel ashamed or embarrassed to seek help when facing financial difficulties. This reluctance to address financial problems early on can exacerbate the situation, leading to more severe financial consequences down the line. It’s essential to recognize that experiencing financial hardship is not a reflection of personal failure but rather a common challenge faced by many individuals, especially during times of economic uncertainty. At Spergel, we have genuinely seen it all – and our Licensed Insolvency Trustees will always treat any individuals we meet with dignity, compassion and understanding. After all, financial hardship could happen to anyone.

What to do if you are facing consumer insolvency

If you find yourself struggling with debt and facing the prospect of insolvency, it’s crucial to remember that you are not alone. Equally, no matter how bad you might feel your financial situation to be, there is always a solution. Seeking professional assistance from an experienced Licensed Insolvency Trustee can provide you with the support and guidance you need to navigate your financial challenges effectively. In fact, they are the only professionals in Canada legally able to file all forms of debt relief. Whether through debt counselling, consumer proposals, or personal bankruptcy filings, there are options available to help you regain control of your finances and build a brighter financial future:

  • Filing a consumer proposal. A consumer proposal is a legal form of debt settlement, administered with the support of a Licensed Insolvency Trustee. It’s a formal negotiation put in place with your creditors – in most cases, they will oblige because they would rather receive some funds than nothing, as they would in a bankruptcy. Filing a consumer proposal can reduce your debt by up to 80%, while avoiding the consequences of a bankruptcy. It offers you the ability to keep your assets, and protects you from your creditors. At Spergel, we have a 99% acceptance rate on any consumer proposals we file.
  • Filing bankruptcy. Bankruptcy is the process of assigning any non-exempt assets you may have over to your Licensed Insolvency Trustee, in exchange for the clearance of all your unsecured debts. It’s the best – and quickest – way to a fresh financial future. You receive immediate protection from your creditors via a stay of proceedings, and at Spergel we can help you on your journey through life after bankruptcy by sharing advice and guidance on how to rebuild your credit score.

Consumer insolvency in Canada: FAQs

Here are some of the questions we’re asked the most about consumer insolvency in Canada:

How does insolvency work in Canada?

In Canada, insolvency is managed through legal procedures intended to offer relief to individuals and businesses unable to meet their financial obligations. Governed primarily by the Bankruptcy and Insolvency Act (BIA) for individual and business insolvencies, and the Companies’ Creditors Arrangement Act (CCAA) for corporate restructurings, the process begins with seeking advice from a Licensed Insolvency Trustee. Individuals facing insolvency may choose between filing for bankruptcy, which involves liquidating assets to pay off debts, or filing a consumer proposal, a legal arrangement to repay creditors a portion of your debt or extend payment terms. The choice depends on the debtor’s specific situation and aims to provide a fresh financial start upon completion, while balancing the interests of creditors.

What is the trend in insolvency in Canada?

In recent years, Canada has witnessed a notable trend in insolvency that reflects broader economic challenges and shifts in consumer behaviour. The trend has been characterized by fluctuating rates of consumer insolvency, including both bankruptcies and consumer proposals, influenced by factors such as high household debt levels, rising living costs, and interest rate changes. Although specific periods have seen declines in insolvency filings, largely attributed to government support measures and temporary relief during crises like the pandemic, underlying financial pressures continue to pose risks for Canadian consumers. The ongoing economic uncertainty, coupled with the winding down of relief programs and adjustments in interest rates, suggests that insolvency rates will continue to evolve, underlining the importance of financial resilience and access to debt relief options for those facing financial difficulties.

What percentage of Canadians are close to insolvency?

In shocking new data, it appears that 51% of Canadians are $200 or less from being unable to meet their financial obligations. This is a huge number of Canadians that are on the brink of facing insolvency and requiring debt relief support in order to get their finances back on track.

How does a consumer proposal work in Canada?

These are the typical steps followed by Canadians who file a consumer proposal:

  • An assessment by a Licensed Insolvency Trustee. To file a consumer proposal, an individual must work with a trustee who assesses their financial situation to determine if a consumer proposal is viable, based on their income, debts, and assets.
  • A proposal to creditors. The trustee will prepare a proposal on behalf of the individual, offering to pay creditors a percentage of what is owed, extend the payment terms, or both. The proposal must offer creditors more than they would receive if the debtor were to declare bankruptcy.
  • A stay of proceedings. Once the proposal is filed with the Office of the Superintendent of Bankruptcy (OSB), there is an automatic stay of proceedings. This means creditors can’t take legal action to collect their debts, and any actions already started (like a wage garnishment) must stop.
  • Creditors’ meeting and voting. Creditors have 45 days to accept or reject the proposal, and a creditors’ meeting will be called if creditors holding at least 25% of the debt request one. The proposal is accepted if creditors holding a majority of the debt vote in favour.
  • Completion of payments. The debtor must adhere to the terms of the proposal and make all payments as agreed. This may include surrendering some assets or sticking to a budget.
  • Legal discharge from debts. Once the proposal terms are fully met, the individual is legally released from the debts included in the proposal, except for certain types such as alimony, child support, or fraudulent debts.

What happens if you can’t afford insolvency?

If you find yourself in a situation where you’re unable to afford the costs associated with declaring insolvency in Canada, such as filing for bankruptcy or making a consumer proposal, there are still options available to help manage your situation. Licensed Insolvency Trustees can provide advice on alternative debt relief solutions, which may include negotiating directly with creditors for more favourable repayment terms, seeking non-profit credit counselling services that can assist with debt management plans, or exploring government assistance programs that could help stabilize your financial situation. It’s crucial to engage with a trustee to explore these alternatives thoroughly, as they can offer guidance tailored to your specific financial circumstances, ensuring you receive the support needed to address your debt challenges without the formal insolvency process.

Ultimately, the increase in consumer insolvency in Canada is a complex issue influenced by various economic, social, and individual factors. By understanding the underlying causes and seeking proactive solutions, you can take steps to address your financial challenges and work towards achieving long-term financial stability. At Spergel, we’re here to support you on your journey to financial wellness – book a free, no obligation consultation with one of our Licensed Insolvency Trustees today.

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Chris Galea

Chris Galea is a Chartered Accountant and Insolvency and Restructuring Professional with over 20 years’ experience as an LIT (Licensed Insolvency Trustee). He is also our resident expert on tax debt, COVID debt, and the region of Saskatchewan, Canada. When he’s not at the office educating people about bankruptcies and consumer proposals, Chris is playing pick-up hockey with his friends, spending time with his family, and learning Spanish!

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