Hoyes Michalos Bankruptcy Study

Hoyes, Michalos & Associates Inc. is one of Canada’s largest personal insolvency firms, focused solely on helping individuals restructure their debt through a personal bankruptcy or consumer proposal.

As required by law, we gather a significant amount of information about each person who files with us. We examine this data to develop a profile of the average person who files for relief from their debt (we call this person “Joe Debtor”). We use this information to gain insight and knowledge as to why consumer insolvencies occur. Our 2019 study reviewed the details of 5,800 personal insolvencies in Ontario from January 1, 2019, to December 31, 2019, and compared the results of this profile with study results conducted since 2011 to identify any trends.

This study explains who files insolvency and provides further insight into why insolvencies rose in 2019.

Here are the key findings from this year’s bankruptcy study.

More Prosperous Households Filing Insolvency

Income is rising for the average insolvent debtor.

Household income rose 5.5% for the average insolvent debtor in 2019, the third consecutive year of income growth. Joe Debtor himself has not earned a raise of this magnitude. What is happening is more prosperous debtors are filing insolvency today than over the past two years. The median income for an insolvent debtor increased by 5.8% to $2,883 in 2019. In 2019, 23% of insolvencies involved households with an average household income above $4,000, up from 20% in 2018.

Insolvent debtors have less cash available to repay more debt.

While average household income rose 5.5%, average expenses grew by 6.4%. Joe Debtor has just $264 available to repay debts, down from $273 the year before. Yet his total consumer debt increased 1.9% from $57,840 to $58,923. The average insolvent debtor has fewer funds available after paying for rising living costs, to meet debt repayment.

The credit profile of the average debtor continues to deteriorate.

Credit card debt is no longer the primary debt in consumer insolvencies. Credit cards account for just 30% of unsecured debt, compared to 32% in 2018, down significantly from 43% in 2011.

Instead, we see a continuing rise in the use of payday or fast-cash loans, high-cost financing loans, student debt, and vehicle financing.  

In 2019, 39% of insolvent debtors carried at least one payday style loan, up from 37% in 2018, and average payday loan debt among payday loan borrowers was up 11.3%.

Other personal loans were up 8.7% in 2019, mostly due to loans from financing and new fin-tech lending companies.

Two in five debtors (40.4%) had a secured car loan at the time of filing compared to 38.2% in 2018. More than 1 in 10 (11.4%) had a shortfall on a vehicle loan, up from 10.2% in 2018.

And while average student loan balances for student debtors grew modestly (0.8%), the percentage of debtors with student debt increased to 19.0% from 17.6% in 2018.

The shift towards a younger debtor is accelerating.

Last year we pointed out that the fastest-growing cohort filing insolvency was Millennials. In 2019, the pace of growth among a younger demographic accelerated. The average age of an insolvent debtor dropped by almost 8.5 months to the lowest level since we began this study in 2011. Those under the age of 40 now account for almost half (47.1%) of all insolvencies.

Below we provide further insight into these trends, followed by the profile of the average person filing a bankruptcy or consumer proposal in 2019.

Income is Rising for the Average Insolvent Debtor

The average household income for all insolvent debtors rose 5.5% to $3,162 (monthly, after-tax) in 2019, the third year of income growth after falling to a low of $2,868 in 2016.

This growth does not mean that Joe Debtor himself saw his income rise.  What is happening is that more people earning a slightly higher income are now filing insolvency. Joe Debtor’s average household income is 50% that of the average Ontarian¹, up from 48% in 2018. Where before debtors with a higher income could manage their debt payments, they can no longer do so.

Insolvencies still largely involve mostly moderate-income earners. In 2019, 77% involved debtors with a household income of $4,000 or less; however, this was down from 80% in 2018. The median household income of the average insolvent debtor ($2,883) was 5.8% higher than in 2018 ($2,726).

The shift towards a higher income earner corresponds with the rise in the use of consumer proposals as a debt relief solution over bankruptcy. In 2019, 68% of consumer insolvencies in Ontario² were proposals, whereas, in 2016, proposals accounted for 57% of all consumer filings. 

Available Cash Flow Deteriorates

So, why are slightly higher income earners filing insolvency now? 

As we highlighted in our 2019 year-end review, living expenses are rising faster than personal income, creating a cash flow shortfall for more consumers. Compound this with existing consumer debt, and you have a rising repayment problem. 

While our year-end review focused on macroeconomic factors, we now have confirmation that this theory holds.  Joe Debtors’ average expenses increased by 6.4% in 2019, faster than the rise in his household income. 

Income & Expenses	2017	2018	2019
Debtor Income	$2,420	$2,530	$2,690
Household Income	$2,873	$2,996	$3,162
Household Income Growth	0.2%	4.3%	5.5%
Household Expense Growth	1.2%	4.2%	6.4%
Income Available to Service Debts	$261	$273	$264
Income Available as % of Household Income	9.1%	9.1%	8.3%
% Employed	79%	81%	80%

Average housing costs grew by 5.5%, average living costs (including food) increased by 6.5%, and transportation costs grew by 8.1%.  

This income-expense squeeze means that Joe Debtor has less money available to pay down debt. In 2019, the average insolvent debtor had just $264 to make debt payments, less than $273 in 2018, despite an increase in household income. Joe’s funds for debt repayment fell by 3.3% while his total consumer debt increased by 1.9%.

Credit Profile Among Insolvent Debtors Worsens

While many analysts focus on the rising level of household mortgages in Canada, we are very concerned about the rise in consumer debt among Canadians, particularly high-cost debt.

Initially, Joe Debtor will make up for a budget shortfall with the use of additional credit. He will do this for as long as possible to avoid default and the loss of use of existing credit lines. However, at some point, Joe Debtor finds he can no longer rob Peter to pay Paul. That is when he pursues insolvency as a way out.

Average consumer debt (defined as unsecured debt plus non-mortgage secured debt) among insolvent debtors increased a modest 1.9% in 2019. 

What is more concerning than the rate of growth, however, is the change in Joe Debtor’s debt profile from a year ago. Joe Debtor today is relying much more on high-cost loans and payday loans, largely because that is what is available to him.

Below is the credit profile of the average insolvent debtor in 2019:

	2018	2019	Change
Personal/Financing loans	$15,025	$16,330	8.7%
Payday style loans	$1,919	$2,264	18.0%
Credit card debt	$15,905	$14,885	-6.4%
Tax debts	$8,835	$7,424	-16.0%
Student loans	$2,597	$2,817	8.5%
Other unsecured debt	$5,008	$5,243	4.7%
Non-mortgage secured debt	$8,550	$9,960	16.5%
Total Consumer Debt	$57,839	$58,923	1.9%

Credit Cards

Credit card debt is no longer the main driver of consumer insolvencies.

As the use of payday loans increases and insolvent debtors trend younger, the prevalence of debtors with access to a credit card or high credit limits declines.

Credit Cardsa	% With Credit Cards	Average Balance	# Cards	% of Unsecured
Joe Debtor	89%	$16,632	2.9	34%
Payday loan borrower	86%	$7,858	2.4	21%
Student debtor	89%	$11,895	2.6	25%
60+	92%	$26,174	3.5	39%

^{a: those with credit card debt}

Only 86% of insolvent payday loan debtors had at least one credit card, compared to 89% for Joe Debtor. His balances are also much lower, reflecting his lower credit score, which is a prime reason why he turns to payday loans as a lending source.

Debtors aged 60+ continue to carry the highest credit card balances with balances built up over an extended period of time.

Personal Loans

Personal loans (excluding payday loans which we analyze separately) include loans from traditional lenders, financing companies, new online or fintech lenders, and private loans. They include overdrafts, lines of credit, and installment loans.

These forms of personal loans increased by 8.7% in 2019, with much of this growth driven by high-interest loans from financing companies and new online lenders.

Vehicle Loans and Shortfalls

Another area that saw significant growth for insolvent debtors in 2019 was secured non-mortgage debt, up 16.5%. This debt is largely vehicle loans as well as furniture loans, secured credit cards, liens and property taxes.

With fewer homeowners filing insolvency right now, a vehicle is often the largest asset owned by most insolvent debtors.

In bankruptcy, debtors can keep their car, either because it is financed and they choose to keep up with their car payments, or, if the car is owned because its value is below the Ontario exemption limit. If financed, a debtor can also choose to return the vehicle and include any shortfall in their bankruptcy or proposal.

Two-thirds (66%) of insolvent debtors in 2019 owned a vehicle at the time of filing, with an average trade-in value of $11,536.

Almost 2 in 5 (39%) own their vehicle outright. The average value of an owned vehicle in our study was $3,713, significantly below the current exemption limit of $6,600 in Ontario.

The percentage of vehicles financed by a loan or lease has risen sharply since 2015. As of 2019, 61% of vehicles were financed, up from 57% in 2018 and just 43% in 2011.

The average value of a financed vehicle was $16,526, up 2.2% from 2018, while the average secured car loan debt among encumbered vehicles grew by 2.0% to $17,537.

Rising vehicle loans put pressure on Joe Debtor in two ways: monthly payments that strain his budget and negative equity.

Transportation costs for the average debtor increased by 8.1% in 2019 over 2018 and consume 20% of his household budget.

Almost 3 in 10 (28%) financed vehicles, owned at the time of filing, had negative equity. For those with negative equity, the average estimated shortfall was $10,380 on an average car loan debt of $24,329. If a debtor has a shortfall on his car loan, that shortfall is equivalent to 74% of the value of their vehicle, and the lender is writing off 43% of their loan.

Such a substantial relative shortfall is an indicator that many insolvent debtors have little downpayment, are opting for longer-term loans and are likely rolling old debt into new when trading in for a newer vehicle.

Not surprisingly, vehicle financing is more common among younger age groups, with 70% of those 18-29 financing their vehicle and one-third having a shortfall on their car loan. That shortfall was equivalent to 89% of the value of their vehicle. In other words, if they had a shortfall, they owed almost twice what their car was worth.

	% own vehicle	% financed	% with shortfall	Shortfall/Value
18-29	55%	70%	33%	89%
30-39	64%	66%	26%	73%
40-49	63%	63%	29%	65%
50-59	72%	54%	27%	80%
60+	68%	46%	23%	79%
All Debtors	66%	61%	28%	74%

To put this in perspective, at least 11.4% of insolvent debtors are filing insolvency with a shortfall on a vehicle owned at the time of filing, up from 10.2% in 2018. The problem, however, is larger than that. The above data analyzes debtors who still own their vehicle when they file insolvency as both the asset and the debt are reported on the debtor’s statement of affairs. If a vehicle has been surrendered or repossessed before filing, no asset is recorded, only the shortfall appears, recorded as an unsecured personal loan.

Payday Loans 

Payday loan use continued its upward trend, in terms of usage, loan size, and share of unsecured debt.

In 2019, 39% of insolvencies involved payday and fast cash loans, up from 37% in 2018.

Insolvent debtors with payday loans owe an average of $5,760 to 3.6 different payday lenders. Ontario has banned rollover loans; however, borrowers facing insolvency visit multiple locations or shop online to use one payday loan to pay off another, creating a shortfall funded with another payday loan.

Payday loan lenders like to say that payday loans provide access to funds for borrowers with poor credit for an emergency. However, insolvent debtors are much more likely to be using payday loans to pay for everyday day living expenses. As living costs outstrip wage growth this trend is rising among overly indebted households. Unfortunately, the high cost of payday loans accelerates the road to insolvency.

Payday Loansa	2017	2018	2019
% with payday loans	32%	37%	39%
Average payday loan debt	$4,141	$5,174	$5,760
Consumer debt	$41,098	$44,350	$45,956
Average age	40.1	40.0	40.1
Income available to service debts	$246	$271	$263
Income available as % of household income	8.5%	8.9%	8.2%

^{a- those with a payday loan}

Average payday loan debt (among insolvent payday loan borrowers) rose 11.3%. For those with payday loans, payday loan debt accounts for 16% of their total unsecured debt, a number that has also been on the rise.

Borrowers are also taking out larger dollar loans. The average payday loan size increased by 22.1% in 2019 to $1,613.

Debtors under the age of 40 are still the most prolific users of payday loans Almost half (48%) of those aged 18 to 19 use payday loans, largely because they have no other credit alternatives.

While younger debtors are the most prolific users of payday loans, a concerning trend is the continued rise of payday loan usage among older debtors. The availability of larger, installment, and line of credit fast cash loans available from payday lenders may be a factor in driving this growth. 

Student Debt

The proportion of insolvent debtors with student debt increased to 19% of all insolvent debtors in 2019.

Under Canadian bankruptcy law, student loan debt is not automatically discharged by bankruptcy or a consumer proposal unless the debtor has been out of school for at least seven years, which is why the average student debtor is 34.8 years old.

Student Debta	2017	2018	2019
% with student debt	15.1%	17.6%	19.0%
Average student debt	$13,877	$14,729	$14,850
Consumer debt	$50,924	$53,033	$55,350
Average age	35.1	34.6	34.8
Income available to service debts	$238	$258	$246
Income available as % of household income	8.9%	9.1%	8.3%

^{a-those with student debt}

While average student loan balances for those with student debt increased modestly (up 0.8%), their total consumer debt increased by 4.4%.

Again, it is the change in the profile of debt they carry that is more concerning than how much their total balances grew.

Student debtors are heavy users of payday loans; 42% of those with student debt also owed at least one payday lender. For those with a payday loan, their payday loan debt increased 11.7% in 2019, slightly more than Joe Debtor (11.3%).

Although average credit card balances have declined overall, student debtors have returned to using credit cards.  Average credit card balances for those with a student loan increased by 17.1% in 2019.

While fewer student debtors own a vehicle if they do they are more likely to have a car loan or lease (66%) than the average debtor (61%); 30% have a vehicle shortfall (vs 28% for Joe Debtor), and that shortfall represents 80.4% of their car value ($12,780) compared to 74.4% for Joe Debtor ($13,949).

Servicing Costs

The trend towards high-cost debt accelerates the period between when someone takes on debt and when they become insolvent. Even at a modest blended rate³, including high-cost financing and payday loans, Joe Debtor’s minimum interest costs are an estimated $1,201 per month, an estimated 8% higher than they were in 2018.  Yet his available cash flow to meet these rising payments is 3.3% lower than it was a year ago.

Shift Towards a Younger Filer Accelerates

The average age of an insolvent debtor in 2019 was 42.5, a sharp drop from 43.2 in 2018. 

The most recent shift towards younger filers began three years ago; however, the pace accelerated in 2019 with the average insolvent debtor 8.5 months younger than he was in 2018. Debtors between the ages of 25 and 34 had the highest share of insolvencies since our study began.

In 2019, those between the ages of 18 and 39 accounted for almost half (47.1%) of all insolvencies, significantly higher than any other year in our study.

Conclusion

While Canadians are still adding to overall debt balances, growth in consumer credit (excluding mortgages) has decelerated⁵ since the end of 2017.

And yet, during this same period, consumer insolvencies increased. Total Ontario consumer insolvencies are expected to increase by an estimated 16%² in 2019, the fastest rate of growth since the 2009 recession.

While previously, Canadians were balancing their budget with debt, many can no longer do so. Combine pre-existing high consumer credit with living costs increasing faster than income, and insolvency becomes inevitable. In 2019, we saw these pressures begin to affect those with marginally higher incomes. Even if all we do is continue along this trajectory, with no economic downturns, we expect insolvencies will rise moderately in 2020.

Past credit sins are now catching up with slightly more prosperous debtors.

Students are still graduating crippled with debt. It is hard to believe that recent graduates will be in a better position financially in 7 years (after which they can absolve student loans through a bankruptcy or proposal) than their recent predecessors. This will mean many more student debtors flowing through the insolvency system in years to come.

And as we have warned before, if interest rates rise, if we experience a recession, and if housing prices fall, we can expect insolvencies to increase more dramatically.

Joe Debtor: Profile of the Average Insolvency Debtor

The table below presents a snapshot of today’s average insolvency debtor based on our 2019 annual study, as compared with 2018.

GENDER

We continue to see a rise in women filing insolvency.  As of 2019, 48.8% of insolvencies were filed by female debtors, and the rate of insolvencies by gender is converging towards that of the overall adult population, which, according to Statistics Canada⁴, was 50.3% female as of July 1, 2019.

As outlined in our in-depth report on Women and Bankruptcy, despite carrying 18.6% less consumer debt than male debtors, women face an elevated risk of filing insolvency as they are more than 3 times as likely to be single parents, twice as likely to carry student debt and earn 4.2% less than their male counterpart.

AGE

The average insolvent debtor in 2019 was 42.5 years old, younger than 43.2 in 2018.  As noted earlier, the percentage of young debtors has increased while the percentage of debtors over 40 has declined. Millennials are now the largest cohort filing insolvency.

This study is based on actual personal insolvencies in Ontario from our service areas: