TORONTO – While the per capita insolvency rate in Ontario has declined to a 15-year low, new research from Hoyes, Michalos & Associates has found some surprising results about today’s insolvent person, “Joe Debtor”. His income is well below the Ontario median and he is likely to be in an at-risk household that is experiencing financial difficulties even before factoring in his debt repayment.
Using Debt to Make Ends Meet
The research shows that Joe Debtor uses most of his income to pay for necessities, not luxuries. He spends more than the recommended portion of his income on housing, personal and regular living expenses. Joe Debtor uses debt to pay for his day to day expenses, as well as any emergency expenses that arise. This vicious cycle creates an environment where Joe Debtor takes on new debt JUST to pay for his existing debt.
“Joe Debtor is using debt to make up for a lower than average, intermittent or stagnating income,” says Ted Michalos, Licensed Insolvency Trustee and co-founder of Hoyes Michalos. “It’s not accurate to say that Joe Debtor is financially irresponsible. In most insolvencies, he isn’t using credit to live beyond his means – he’s using debt to make ends meet. The typical insolvent person in Ontario has just $302 left each month after paying their living expenses to repay debt that carries an estimated monthly interest of $960. The math just doesn’t work.”
According to Licensed Insolvency Trustee Doug Hoyes, “Joe Debtor is earning enough money to qualify for credit, but not enough to balance rising living expenses with debt repayment. Almost two-thirds of insolvent persons earn an after-tax household income that is in the bottom quartile of household earnings in Ontario.”
The Everyday Faces of Insolvency
Millennials: More likely to file insolvency
Millennials aged 18-29 make up 14% of Ontario insolvencies, up from 12% in our 2015 study. “Adding student debt, credit cards or payday loans to job insecurity and no financial safety net increases the risk that a millennial will become insolvent,” notes Ted Michalos. Almost one-third of insolvent millennial debtors carry student debt while 38% have payday loans.
Seniors: Struggling under severe debt load
According to the new Hoyes, Michalos & Associates study, seniors aged 60 and older are the fastest-growing risk group for filing insolvency and now make up 12% of all insolvent debtors. Having carried debt into retirement, seniors struggle to balance debt repayment with rising food, energy, medical and living expenses. Doug Hoyes notes, “Indebted seniors drain their retirement savings to repay debt, often resulting in unpaid tax debts. It is also alarming that more than one in ten insolvent seniors turn to payday loans.”
Single Parents: Disproportionately filing insolvency
Single parents struggle to keep up with the rising cost of raising a family alone and are twice as likely to become insolvent than two-parent households. Three-quarters of single parent insolvency filings are made by women. “Many single parents are balancing both student debt and family care,” says Ted Michalos, adding, “Payday loans become a last resort to help make ends meet until they can no longer borrow. Then the single parent reaches a breaking point and files insolvency.” One in five insolvent single parent debtors carry student debt while one-third have at least one payday loan.
Can the Cycle of Debt be Broken?
“Definitely”, says Doug Hoyes, a leading voice on personal debt issues in Ontario, who offers the following suggestions to anyone struggling with debt:
- Create a repayment plan from the start. Pay more than the minimum payment and make it your goal to pay down any balances as soon as you can.
- Build a small emergency fund. Even having a small savings amount can reduce the risk that you will be forced to turn to debt to pay for necessities.
- Don’t use predatory lending options like payday loans. These options may seem like a quick fix, but only postpone the cash flow problem until your next paycheque.
- Speak with a Licensed Insolvency Trustee. You do have options when you are using debt to pay for existing debt. A consumer proposal or as a last resort, bankruptcy may be necessary. The sooner you start the process, the sooner you will begin your recovery.