Low Interest Rates Mask Crippling Debt
Canadians do not appear to be worried about high debt levels. Interest rates are at record lows and bankruptcy rates have declined for the last five years. Unfortunately, that obscures the fact that certain at-risk groups don’t qualify for traditional low cost borrowing options, so they turn to payday loans, quick cash installment loans and other high interest crippling forms of debt.
On today’s show Ted Michalos and I discuss the just released Hoyes Michalos study: Joe Debtor: Marginalized by Debt. We started this study eight years ago to provide information to the general public about the average debtor and to get a clearer understanding about the reasons that our clients file bankruptcy or consumer proposals. Every two years we publish our findings and this year's study reveals that specific at-risk groups including seniors, lone parents and student debtors are at a higher risk for filing insolvency.
Ted and I discuss these findings, and explain how to recognize the warning signs of excessive debt.
Who is Joe Debtor?
There's a perception that we as Canadians do not need to worry about debt levels because interest rates are low and insolvency rates continue to decline. However, the reality is that you need to qualify for these financial perks, and as a result, low interest rates do not benefit everyone; effectively pushing our at-risk groups to take out loans with higher interest rates to pay down existing debts.
The common stereotype is that the average person that files bankruptcy is young, unemployed and even homeless. Our study shows that this is just not the case. Instead, the average insolvent debtor is a 44 year old male, most likely married with a dependent and employed in a decent job making $2,427 a month, net profit.
So why does this profile look so much like the average Canadian and what is pushing Joe Debtor to file bankruptcy or a consumer proposal? The simple fact that he owes $56,545 in unsecured debt (credit cards, income taxes, payday loans or personal loans) makes it difficult to cover not only the debt itself, but also the servicing costs associated with it because he doesn't qualify for the aforementioned low interest rates.
Senior Debt Is Increasing
The most troubling trend revealed in our study is the prevalence of insolvent seniors with payday loans. Seniors (60+) make up 10% of all bankruptcies and consumer proposals that we serviced from 2013 to 2014, and they have on average, $3,693 in payday loan debt - the highest of all age groups.
Ted explains that seniors are at higher risk of insolvency because
...there's this misconception. We're all thinking that seniors are like our grandparents. And maybe I'm dating myself here, but they probably didn't borrow a dime over the course of their life, they made sure they paid cash for everything, they saved money like crazy [and] they left something for their children and grandchildren.
This picture is just not real. Seniors are retiring with debt on a fixed income and continuing to help family and friends with their financial troubles. The average Canadian owes $21,000 in credit card debt while insolvent seniors owe $33,355. Furthermore, they owe $12,571 in tax debt, while the average Canadian owes $9,000. These numbers reflect the fact that retired seniors must live on a fixed income while their expenses increase. Many cash out their RRSP to try to alleviate this problem, only to be taxed on the amount, and in effect, owe more in taxes at the end of the year.
Female Lone Parents And Student Debtors Face Added Pressure
Lone parents are another at-risk group identified in our 2015 Joe Debtor study. Of the 6000 clients included in the study, 18% were lone parents; and 75% of those filers were female. This individual has 2 dependents and 86% of lone parents are employed. I ask Ted why lone parents pose a high risk for filing insolvency and he explained that
...40% of these people have got a car loan payment that they're trying to make. 20% of them have student debts that they're trying to deal with. So, they've got all of the regular living expenses of a household but they've only got a single income to deal with it.
The reality is that lone parents are borrowing credit to live.
For females, the risk for needing to file insolvency increases due to factors such as sporadic employment, being off work for things like maternity leave and family sick leave, as well as their higher propensity to carry student loan debt (13.4% of our clients had student loan debt and 60% of those individuals were female).
To pay off these everyday debts, payday loans and fast cash installment loans are used to make ends meet. Ted addresses this debt cycle asserting that,
once you get on that payday loan treadmill, it's almost impossible to break.
If you fall into one of these at-risk groups or are struggling to maintain your monthly expenses; if you're considering taking out payday loans or fast cash installment loans just to pay the rent, we suggest you get professional financial advice. Speak to a bankruptcy trustee or a non-profit credit counsellor to discuss your options before the situation gets worse.
Click here for the full podcast transcript, including more information about our study and what you can do to pay off debt.
Resources Mentioned in the Show
- Hoyes, Michalos and Associates Inc. 2015 bankruptcy study - Joe Debtor: Marginalized by Debt
- Canadians Drawn Into Cycle of Debt