Insolvent Ontarians owe an average of $54,000: report

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Consumer insolvencies in Ontario have risen 26.2 per cent with the average insolvent debtor owing over $54,000 in unsecured debt, according to a recent report by Hoyes, Michalos and Associates Inc., an Ontario-based Licensed Insolvency Trustee firm.

Here’s a look at some of the findings from the report.

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Insolvency vs. bankruptcy: What’s the difference?

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For consumers, insolvency is when a person cannot meet the financial demands of their debts and needs to file either a consumer proposal to renegotiate their debts or file for bankruptcy. The differences between consumer proposals and bankruptcies are that a consumer proposal is an agreement made on how current debts will proceed and you keep your assets, while bankruptcy is a legal process where you declare you cannot pay back your debts and, if possible, assets are taken and monthly payments are made to pay-off debts.

“People do bounce back from (insolvencies…) Consumer proposals (are) deals we make with the creditors so you avoid bankruptcy. The typical person who comes to see me, as we said in our study, has about $54,000 of unsecured debt from credit cards, bank loans, payday loans, and income taxes and they don’t have $54,000 to just pay everyone back, but they also don’t want to go bankrupt because in a bankruptcy the payments are geared to your incomes,” said Doug Hoyes, co-founder of Hoyes, Michalos and Associates Inc. “In Canada, about 85 per cent of insolvencies are consumer proposals and only 15 per cent are bankruptcies, so people would prefer to make a deal. It be something like ‘I’ll pay $300 a month for the next five years at $18,000 and in return, the creditors will wipe out the rest of my debts.’”

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As per the report, people aged 30-39 were most likely to declare insolvency making up 31.7 per cent of insolvent debtors, the next highest were people aged 40-49 at 24.3 per cent with those in their 50s following at 17.4 per cent. The least likely to declare insolvency were those aged 18-29 at 15 per cent and those older than 60 at 11.7 per cent.

To develop the study, Hoyes, Michalos and Associates Inc. reviewed the details of 3,400 people who filed a consumer proposal or personal bankruptcy with them in 2023 and used that information to create the profile of the average insolvent debtor, named “Joe Debtor.”

Credit cards are the ‘obvious’ culprit: report

According to the report credit card debt was one of the main culprits of insolvencies in 2023 with 91 per cent of insolvent debtors filing with outstanding credit card debt at an average of $17,816, increasing 12.8 per cent from the previous year. Those aged 18-29 saw the largest increase in credit card debt this year, increasing 34.5 per cent.

“We can only speculate, but you think about someone in their 20s… and these would be people who are most likely to have student loan debt,” said Hoyes. “If your parents aren’t paying for it, you’re getting a student loan, which means you’re graduating with a student loan. How do you then set up shop? How do you get your own apartment? How do you get yourself established until your income picks up? Well, credit cards is the obvious one.”

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Higher-income insolvencies rose in 2023 as well with inflation, interest and overall cost of living making it increasingly difficult for older debtors according to Hoyes.

“Even though you’re making more money, your cost of living has gone up… Our clients income was up about 8.6 per cent,” Hoyes said. “If your costs are up even higher than (8.6 per cent) obviously it’s a problem. It’s not just the rate of inflation… it’s interest rates, if you had debt, then the interest you were paying on that debt was also a lot higher, it’s a double whammy. Higher costs to live plus higher interest rates that are not keeping up with increases to income, so, you use debt to survive, if you can’t do it, that’s what leads to insolvency.”

According to Sal Guatieri, senior economist and director at BMO Capital Markets, if the economic situation stays weak, consumer finances could worsen.

“The economy is fairly weak. In fact, for the longest stretch, we were pretty well stalled through much of last year, (real) GDP actually contracted in the third quarter a bit. Now, it looks like we pulled out of it late last year, probably because of our major trading partner in the U.S., doing exceptionally well. But there’s no doubt the economy is weak and is expected to remain soft, at least for the next quarter… The Bank of Canada, although signalling that the next move in (interest rates) is likely downwards, is reluctant to lower rates too soon because inflation is still well above the target.” Guatieri said in an interview with National Post. “Thankfully we don’t expect things to stay the way they are now. We expect the economy to pick up through the second half of this year and more so next year on the back of interest rate reductions led by the bank of Canada this summer.”

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A BMO report from January concluded that high debts and weak spending suggested “Canadian household finances are more fragile than usual,” and “lower-income households, with limited savings and substantial debt relative to income are especially at risk.”

“A lot of households did pile up savings through the pandemic and are sitting on a nice cushion to support spending and bill payments right now. But there’s also a sizeable number of mainly lower-income households that do not have extra savings. In fact, they have probably been dipping into their overall savings to support bill payments, debt payments and spending given the higher cost of living and interest rates,” Guatieri said. “Upper-income households and a lot of middle income households are probably doing okay, but lower-income households are struggling right now.”

The report showed the bottom quintile of earners, or bottom 20 per cent, had the highest debt ratio at 317 per cent, meaning that their total debts are over three times as high as their annual income. According to Guatieri, this problem is compounded by a higher-than-normal inflation rate hovering above 3 per cent, causing real income, or income after inflation, to fall for some earners.

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“The (Bank of Canada) did signal that the next move in (interest) rates almost certainly is a reduction rather than a further increase. But they are reluctant (to act until seeing) more evidence that inflation will get back to 2 per cent on a sustained basis,” Guatieri said. “We’re pretty confident that the bank will begin reducing rates by June of this year, we could see (one percentage point cut in rates) by the end of this year and (a similar reduction) by the end of 2025.” Guatieri said that interest rate reductions will go a long way in strengthening the economy as well as consumer finances.

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