Debt: Why is our Debt so High, and What's the Solution?

Posted in Debt Help
Posted by J. Douglas Hoyes, CA, CPA, LIT, CIRP, CBV

I don't have a desire to be the bearer of bad news, but as we proceed into 2012, I have bad news: Canadians are carrying record levels of debt. Whose fault is it that we have so much debt? The bank's fault for lending us too much, or our fault for borrowing it? I answered that question on the radio a few weeks ago with a six minute rant, which you can watch here, where I concluded that we are all to blame:

Back to our record levels of debt: The average Canadian owes $153 for every $100 they earn.

Think about that.

If you have a job where you take home $30,000 per year, and if you are the average Canadian, you owe about $46,000. In fact, according to Statistics Canada, household debt per person in Canada is $46,100, which is 1% higher than it was three months ago, and 5% higher than it was a year ago.

Think about that.

If you are average, you are carrying 5% more debt today than you were carrying a year ago.

Did your pay go up 5% this year? Probably not. According to Statistics Canada, average hourly wages were up 2.4% in the last year, but that's just the average. If you work through a union your wages were only up 1.5%, and if you are a temporary worker your wages only increased by 1.0%.

Perhaps the news isn't all bad? Perhaps we have more debt because we borrowed to invest, and our investments went up in value, so even with higher debt we are actually better off?

Nope.

Household net worth per person fell 2.5% in the last three months. That's a big drop. Even worse, in 2010, when we released our study on Joe Debtor: The Profile of the Average Bankrupt, the average bankrupt owed 2.2 times his annual income in debt.  As of today, based on our own proprietary data, our debt is now 2.4 times our annual income.

Is there no good news? I suppose the fact that for the twelve months ended August 31, 2011 total personal insolvencies in Canada are down 9.7%, and personal bankruptcy filings are down 16.7%, is good news. However, the bankruptcy rate increased significantly in the past, peaking in 2009, so this year's drop is just a drop to still very high levels. The unemployment rate in Canada has dropped since the peak in 2009, which is good news.

However, it's no surprise that 2009 was both the peak in unemployment and bankruptcy filings in Canada, so those two statistics are related. The unemployment did rate did increase in November, so if that trend continues we could see higher bankruptcy rates in the future.

Here's my point: We are carrying more debt than ever before, and debt is bad. If you want to know why, Ted Michalos and I discussed that on the radio as well (and this clip is under two minutes):

Debt reduces your cash flow each month, and if you are trying to pay interest on debt you don't have money to save for your children's education, or retirement, or anything else. If you have debt, your resolution for 2012 should be: get out of debt.

You can get out of debt by making a household budget and cutting expenses. If you have more debt than you can handle, credit counselling, a consumer proposal or even personal bankruptcy may be required. Try our debt options calculator to see which option may be right for you, but above all, make a plan and start today.

Debt problems do not go away on their own, so the sooner you start, the sooner you can be living debt free.

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About J. Douglas Hoyes

Doug is our co-founder and is a Licensed Insolvency Trustee, Consumer Proposal Administrator, certified Insolvency Counsellor and Chartered Professional Accountant.

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