joe debtor: marginalized by debt - hoyes michalos · highest payday loan debt on average at $3,693;...

Joe Debtor: Marginalized By Debt

Prepared By:

J. Douglas Hoyes, BA, CPA, CIRP, CBV, Trustee

Ted Michalos, BAS, CPA, Trustee

Hoyes,Michalos&AssociatesInc.TrusteesinBankruptcy

PrincipalOffice:204–607KingStreetWestKitchener,OntarioN2G1C7Phone:(519)747‐0660

www.hoyes.com

OfficesThroughoutOntario

May,2015

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TableofContents

Introduction................................................................................................................................................................3

Methodology...............................................................................................................................................................3

JoeDebtor–WhyIsHeGoingBankrupt?.......................................................................................................4

Joe’sPersonalProfile..........................................................................................................................................5

SeniorsStillFastestGrowingRiskGroup..............................................................................................5

MoreLoneParentsGettingByOnCredit..............................................................................................7

FixedIncomeABiggerProblemThanNoIncome.............................................................................8

Joe’sDebtPortfolio..............................................................................................................................................8

PaydayLoansAGrowingConcern...........................................................................................................9

Fast&EasyInstalmentLoansJump5Fold.......................................................................................12

VehicleLoanBankruptcyRiskRisesModerately...........................................................................12

UnsteadyIncomeLeadingToTaxDebt..............................................................................................13

WomenMoreLikelyToStrugglewithStudentDebtRepayment............................................14

MarginalizedByHigherThanAverageDebtServicingCosts....................................................15

ConsumerCredit&Insolvencies–What’sAhead....................................................................................16

DataTable1:JoeDebtorProfile–ByAgeGroup......................................................................................18

DataTable2:JoeDebtorProfile–ByRiskGroup....................................................................................19

DataTable3:JoeDebtorProfile–ByIncomeGroup..............................................................................20

References................................................................................................................................................................21

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IntroductionHoyes,Michalos&AssociatesInc.hasprovideddebtrestructuringservicestoindividualsinOntario since 1999. We are one of the largest firms in Canada practicing in the area ofpersonal insolvency. We work exclusively with people, not corporations. Our focus ishelpingindividualssolvetheirpersonalfinancialproblems.

The amount of media coverage surrounding the ongoing consumer debt crisis has beenrelentless. Yet despite all the warnings, many Canadians still find themselves facingcripplingdebt.Howisthispossible?

It is toosimple tosay“Peopleshouldonlyspendasmuchas theyearn”.Formanyat‐riskgroups, marginalized from the economic recovery or struggling due to personalcircumstance,thisismucheasiersaidthandone.

For many Canadians, day to day living expenses are growing faster than their incomes.Many consider credit to be their only saving grace. Individuals facing severe financialproblemswilldoalmostanythingtoretaintheiraccesstocredit.Theymakeeveryefforttomaintain theirminimumpayments toensuretheycancontinuetouse theircredit. In factnationallyabout70%ofconsumeraccountsarepaidasagreed(arenotdelinquent)whenaperson files for bankruptcy1. As their balances and required payments increase, theyborrowmoremoneyinordertomaketheircreditcard,carloanandmortgagepaymentsontime.Formostinsolventdebtors,muchoftheirdebtisincurrednottofundspending,buttoserviceotherdebtandcoverongoinginterestpayments.

Capitalizing on this demand for short term cash, new players and new products haveentered the market, many of which offer riskier borrowing options. All of this creates aperfect storm of continued consumer debt problems for a significant portion of thepopulation.

Our newest study shows that, no matter what their intentions may be, more at‐riskindividualsarebeingdrawnintoanescalatingcycleofdebt‐totheirdetriment.

MethodologyAs required by law, Hoyes, Michalos & Associates Inc. gathers a significant amount ofinformationabouteachpersonthatfileseitheraconsumerproposalorbankruptcywithus.We know their income, family size, age, gender, assets and debts. Every two years, weexaminethisdatatodevelopaprofileoftheaveragepersonwhofilesforrelieffromtheirdebt (we call this person Joe Debtor). We use this information to gain insight andknowledgeastowhyconsumerinsolvenciesoccur.

Our current study reviewed the details of almost 6,000 personal insolvencies from 2013and 2014. This yearwe dug deeper, beyond demographics, and took a hard look at thetypesofcreditbeingused.Insomeregards,therehasbeenverylittlechangeintheprofileoftheaverageJoeDebtor;inothers,wehavediscoveredsomealarmingtrends.

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JoeDebtor–WhyIsHeGoingBankrupt?Our2015JoeDebtorreportisbasedonareviewof6,000insolvencyfilingsfromJanuary1,2013toDecember31,2014.Wethencomparedtheresultsofthisprofilewithourpreviousreportconductedin20132toidentifyanytrends.

Our typical insolvent debtor is a 44 year old male, married with children. He owes onaverage$56,545inunsecureddebt;morethanthreetimestheaverageconsumercreditperadultinCanadaof$18,2073.

Formostdebtors,thetriggerforfilingbankruptcyisoftenanunexpectedlifeeventsuchasjobloss,illnessorrelationshipbreakdown.Therehasbeenlittlechangeintheseunderlyingcauses since we began our study in 2008. However this masks the true image of theindividualthatfindsthemselvesturningtobankruptcyoraconsumerproposaltodealwith

JoeDebtor 2013‐2014 2011‐20122

PersonalInformation:Male 54% 57%

Female 46% 43%

Averageage 44 43

MaritalstatusMarried/Common‐law 40% 43%

DivorcedorSeparated 28% 28%

Widowed 2% 2%

Single 30% 27%

Averagefamilysize(includingdebtor) 2.2 2.3

Singlepersonhousehold 43% 41%

Likelihoodofhavingdependant 43% 44%

%LoneParent 18% 16%

Averagemonthlyincome $2,427 $2,367

Totalunsecureddebt $56,545 $57,972

Unsecureddebt‐to‐income 194% 204%

Likelihoodtheyownahome 24% 29%

Averagemortgagevalue $197,137 $208,070

DetailedInformationontheamountofaverageunsecureddebt:Personalloans $19,266 $19,184

Creditcards $20,776 $23,708

Taxes $9,114 $6,834

Studentloans $1,849 $1,689

Other $5,540 $6,557

Filedbankruptcy 45% 44%

Filedconsumerproposal 55% 56%

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excessivedebt.HowdidJoegetthereandwhy?Toanswerthesequestionswelookedatthepersonaldemographicsofourstudygroup,aswellastheirdebtportfolio.

Detailed tables of our results are included towards the end of this report. The followinghighlightsourkeyfindings.

Joe’sPersonalProfileWhiletheaverageinsolventdebtorismorelikelytobemale,thepercentage of female debtors increased substantially since ourlast study. In 2013 only 43% of all insolvencies were filed byfemale debtors; in 2015 thatnumberincreasedto46%.

Weshallseelaterinthisreportthatfemaledebtorsfaceanelevatedriskof insolvency from student loans

and the difficult financial problems faced bywomenwho, assingle parents, are struggling to manage financially on theirownwhileraisingchildren.

SeniorsStillFastestGrowingRiskGroup

Onaverage,JoeDebtoris44yearsold;sixmonthsolderthantheaveragedebtortwoyearsago.

Whilethemajorityofdebtorsarebetweentheagesof30and49,thetrendtowardsmoreseniors and pre‐retirement debtors filing bankruptcy continued. The share of insolvencyfilingsfordebtorsaged50andoverincreasedto30%inour2015study,comparedto27%in 2013; and the bankruptcy rate among older debtors hasmaintained an upward trendsincewefirstbeganourstudy.

At risk seniors and pre‐retirement debtors have accumulated a massive unsecured debtload,thehighestamongallagegroups.Inaddition,theyweretheonlyagegrouptoreportanincreaseintotalindebtednessin2015.

Age Distribution18–29 12%

30–39 29%

40–49 28%

50–59 20%

60–69 8%

Over70 3%

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Onaverage,debtors50andoldercarriedtotalunsecureddebtof$68,677;1.7%higherthanourpreviousstudyand21%higherthantheaverageJoeDebtor.Debtorsovertheageof60were themostheavily indebtedofallagegroups,witha totalunsecureddebtof$69,031.Pre‐retirementdebtors (thoseaged50‐59)saw thehighestgrowth inunsecureddebt,up2.3%.

3 in10 insolvencieswere filedbydebtors50andolder. Seniorsandpre‐retirement debtors were the only age groups to increase theiroveralldebtloadandexperienceahighershareofallinsolvencies.

Ingeneral,olderCanadiansarecarryingdebtintoretirementasaresultof:

Debtaccumulatedovertimetopayforlivingcosts,familyneedsandmedicalbills;

Additionalborrowingtokeepupwithpost‐retirementmortgagesandthefinancialcostofcarryingunsecureddebtintoretirementasincomedrops;

Taxobligationsfromextraearnedincomeandpensionwithdrawals.

Almosthalfoftheirdebtiscreditcarddebtandinmostcases,thisdebtaccumulatedoveranumber of years. This progression becomes evident as Joe Debtor’s credit card debtincreasesforJoeDebtorasheages.

Cripplingdebtdoesnotusuallyappearovernight,orevenoverayearortwo.Foryoungerdebtors,itbeginswithafewcreditcarddebtstofundexpenseswhileJoeDebtorlooksforajobaftergraduation.MiddleagedJoeaddstohisdebtashisfamilygrows.Inpre‐retirement,Joeisfacedwiththefinancialdemandsofputtingolderchildrenthroughschoolanddealingwithpotentialhealthissuesforeitherhimselforhisagingparents.All thiswhiletryingtokeepupthepaymentsagainstdebthehasalreadyaccumulated.

SeniordebtorsaresupportingmoredebtonlessincomethantheaverageJoeDebtor.Theymaybewidowed(14%),divorced(29%)orlivingonafixedincome.Morethanhalf(53%)of seniors live in a singlepersonhousehold, secondonly to18‐29year olds at 57%.And

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over53%ofseniorsareretired,althoughmoreindebtedseniorsreportedtheycontinuedtowork(39%)thaninourpreviousstudy(36%).Thismayaccountfortheincreaseinaverageincomeforseniorssinceourlastreview.At$2,215theiraverageincomeincreased6%fromtwoyearsago;althoughitremainedbelowthatoftheaverageJoeDebtorat$2,427.

Mostseniorshaveafirmdesiretorepaytheirdebtsandtheywillgotoalmostanylengthtokeepupwith theirbillpayments. Inaddition to increasingcreditcarddebt,ourdataalsorevealedanalarmingincreaseinthenumberofseniorsturningtopaydayloansasawaytopaythebillsoncetheircreditcardsmaxout.

Almostoneintenseniors(9%)overtheageof60owedatleastonepaydayloanatthetimeoftheirinsolvency.Whilethisrateisthelowestamongalltheagegroups,seniorshadthehighest payday loan debt on average at $3,693; and themost average number of paydayloansoutstandingat3.7.Seniordebtorswithapaydayloanowedmorethan1.7timestheirtake‐homepayatthetimeoftheirinsolvency.

Paydayloancompaniesmakeiteasyforseniorstotakeoutaloanastheywilllendagainstpension income, includingODSP,CPPoracompanypension.Withastable incomesourceandapropensity towant torepay theirdebt, seniorsarebothagrowing,andvulnerable,groupofborrowers.Wewilladdressmoreconcernsaroundpaydayloanslaterinourstudy.

MoreLoneParentsGettingByOnCredit

Joe is most likely to be married (40% of all debtors weremarried or living common‐law), however, he has a higherthan average chance of being divorced or separated at thetimeoffiling.Divorcecontinuestobealeadingriskfactorforfiling insolvency. Almost one in five debtors listed maritalissuesasanunderlyingcauseoftheirdebtproblems.

Families make up 57% percentofall insolventdebtors,withanaverage household size of 3.1people(includingthedebtor).

While more likely to be married with children, 18% of allinsolventdebtorsareloneparents(eitherdivorcedorsingle),anincreasefrom16%twoyearsearlier.

Withanaveragefamilysizeof2.7,loneparentsaresecondonlytomarriedcoupleswithanaveragefamilysizeof3.3.

Almost1 in5 insolventdebtorswere loneparentsofwhich75%arefemale.Moreloneparentsbecomeheavily‐indebtedastheystruggletomakeendsmeetonalowerthanaveragehouseholdincome.

Primarilyworking,loneparentsaretakingoutloanstopayfortheordinarycostsofraisingafamilyonasingleincome.Infact,while86%ofloneparentswereemployed,theiraverage

HouseholdSize Distribution

1 43%

2 23%

3 15%

4 12%

5 5%

6ormore 2%

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household income, at $2,930, is 4% below that of the average debtor. Furthermore, ourstudyalsoshowedthatthreeoutoffourloneparentswhobecameinsolventwerefemale.

Loneparents’financialproblemsbeginprimarilywithinstalmentdebt.Whiletheydocarrycreditcarddebt,onaveragecreditcardsmakeuponly30%oftheiroverallunsecureddebt,compared to 37% for the average debtor. Instead they are struggling to maintain fixedrepayment debt like car loans and student loans. Currently, 40% of lone parents have asecuredcarloan(comparedto37%ofalldebtors)and19%carryastudentloan(comparedto 13% of all debtors). They are alsomore likely to have debt in collections than otherdebtors.

FixedIncomeABiggerProblemThanNoIncome

JoeDebtorhasajob,withatake‐homepayof$2,427amonth.TheeconomicrecoveryinOntariohasmeant that unemploymenthasbecomelessofafactorininsolvenciesduring the past two years. Only 6% ofinsolventdebtorswereunemployedatthetimeof filing,downfrom8%,while thoseworkingremainedsteadyat81%.

However, once again the percentage of insolvent debtors on disability leave or retiredincreased,reaching10%ofallinsolventdebtors.Thisismoreevidencethatitistheat‐riskCanadianwho is beingmarginalized further by overuse of credit as away tomake endsmeet.

1 in10 insolventdebtorswereona fixed income.Debtorsona fixedincome due to retirement or disability aremarginalized further byoveruseofcreditinordertomakeendsmeet.

EmploymentStatus 2013‐2014 2011‐20121Employed 81% 81%

Unemployed 6% 8%

Retired 6% 6%

Disability 4% 3%

Other 3% 2%

Joe’sDebtPortfolioThegoodnewsisthatJoeDebtor’stotalunsecureddebtloadfelloverthepasttwoyears.At$56,545hisoveralldebtloaddeclined2%.

Our study revealed a rather dramatic drop in credit carddebt for insolvent debtors. Theaverageowingon credit cards fell for the third consecutive study to $20,776, down12%fromtwoyearsago.Infact,overallcreditcarddebtforinsolventdebtorshasbeendecliningsteadilysince2010.

Income Debtor Household

$NIL 2% 1%

$1‐$1,000 8% 5%

$1,001‐$2,000 27% 20%

$2,001‐$3,000 36% 30%

$3,001‐$4,000 18% 20%

$4,000+ 9% 24%

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Thishasledtofewerinsolvenciesdrivenlargelybycreditcarddebt.Inour2013study,43%ofdebtorshadcreditcarddebtsamountingtomorethan50%oftheirtotalunsecureddebt.Thisratiodroppedto38%in2015.Furthermore,theaveragenumberofcreditcardsfellto3.7,downfrom3.9.

Outstanding credit card indebtedness fell12%whilemortgagedebtdeclined5%.Consumersmayreducingormanaging traditionaldebtproducts like credit carddebtandmortgagedebt,resulting in fewercreditcardandhigh‐ratiomortgagedriveninsolvencies.

Thepossiblereasonsforthedeclineincreditcarddebtlevelsforinsolventdebtorsaretwo‐fold.Consumers ingeneralmayhavereduced theirover‐relianceonhighcost credit carddebt. Many have shifted their debt portfolio to lower interest‐rate options includinginstalmentloansandlinesofcredit,reducingtheircarryingcostsandthustheirbankruptcyrisk,atleastfornow.Howevertraditionallendershavealsobeentighteninguponavailablecredit forhighriskborrowers.Asweshall seeshortly, thishas led toan increaseduse insubprimedebtoptionsamongthosestrugglingfinancially.

High‐risk mortgage indebtedness also improved slightly. Increasing housing values,combined with some Canadians paying down larger mortgages, has resulted in fewerinsolvenciescausedbyhigh‐ratiomortgages.Inaddition,morehomeownersareusingtheirhigher equity to settle unsecured debts through a consumer proposal. The averagemortgageforhomeownersfellto$197,137,down5%fromourpreviousstudy.Inaddition,theaverageencumbranceratefellto90%from92%.

PaydayLoansAGrowingConcern

Unfortunately, all of this good news is offset by an alarming increase in the use of highinterest subprime debt by many insolvent debtors as a way to make their minimumpayments. Individualswithpoor credit are increasingly turning topaydayandnewquickcashloansasaformofrevolvingcredittomakeendsmeetandthishasbecomealeadingindicatorofinsolvenciestoday.Debtorsexperiencingcashshortfallsduetoseverefinancialproblemsareborrowingmoneyfrompaydaylenderstomaketheirminimumpaymentson

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their credit cards, and then are forced to turn to more payday lenders to pay off theirexistingpaydayloan.

Almost2 in10debtorscarriedapayday loan.PaydayandquickcashloansarebecominganincreasedsourceofrevolvingcreditandarealeadingdriverofinsolvenciesinOntariotoday.

Insolvencies due to excessive use of payday and fast cash style loans are increasing. Thepercentage of debtorswith at least onepayday loan increased to18% compared to12%twoyearsago.Forthoseusingpaydayloans,theaveragetotalpaydayloandebtincreased12%to$2,749,anamountthatequaled113%oftheirmonthlytake‐homepay.

Not all payday loan companies performcredit checks and today most are notreporting information to the nationalcredit bureaus. This makes it easy forborrowers to obtain multiple loans fromseveral payday loan lenders or to accessother credit while simultaneously using payday loans. In addition, new ‘quick loans’ arebeingofferedonline and individuals looking to solve a short term cash flowproblemareincreasinglyturningtotheseeasiertoreachalternatives.

The average size of a single payday loan increased to $794 from $743 and the averagenumber of payday loans outstanding increased to 3.5 from3.3. One in four debtorswithpayday loans had five or more payday loans outstanding; with one debtor having astaggering35loansatthetimeofinsolvency.

Payday and cash loans are used as a substitute for credit card debt in order to balanceexpensesforthosewithlessaccesstootherformsofcredit.Theaveragepaydayborrowerhadonly$7,195increditcarddebtcomparedto$20,776forJoeDebtor.Histotalunsecureddebtamountedto$35,799,significantlybelowJoeDebtor’saveragedebtof$56,545.Yetthepaydayloanborrowerearnsjustover6%morethanJoeDebtor.Thisisevidencethatitisnotonlytheamountofdebtoutstandingthatleadstobankruptcy,butalsothetypeofcreditused.

Contrary tootherstudies thatpayday loansareusedprimarilyby low incomeCanadians,ourstudyshowsthatpaydayandquickcashloansareusedtoexcessprimarilybymiddleincomeearners.Theaverageincomeforadebtorwithapaydayloanwas$2,577,comparedto $2,427 for all debtors and payday loanswere as likely to be used by debtorswith anincomeover$4,000asthosewithanincomebetween$1,001and$2,000.

PaydayLoans 2013‐2014 2011‐2012%ofdebtors 18% 12%

Totalloandebt $2,749 $2,463

Averageloansize $794 $743

Numberofloans 3.5 3.3

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Youngerdebtorsaremuchmorelikelytomisusepaydayandquickcashloans,whichmaybedrivenbynewonlineaccess.However,theiraverageloansizeissmaller,relativetotheirlowerthanaverageincome.

As noted earlier in our report, we are particularly concerned about the trend towardsseniors’ use of payday loans.While seniors over the ageof 60 account for only9%of allpaydayborrowers,theyowethelargestdebtforpaydayloansat$3,693;seniorsalsohavethehighestnumberofpaydayloansoutstandingat3.7.

Seniorsareturningtosub‐primedebtoptions,includingpaydayloans,tomakeendsmeetonafixedandreducedincomeandthisisleadingtoanincreasingpercentageofseniorCanadiansfilinginsolvency.

MostpaydayloancompanieswillloanagainstCPPandprivatepensionsastheyareastablesourceofincome.Morethansixintenseniorswithapaydayloan(62%)wereinfactretired

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andsurprisingly,35%ofallseniorpaydayloanborrowersinourstudywereovertheageof70.

Fast&EasyInstalmentLoansJump5Fold

Wehavealsonoticedasignificantincreaseintheuseoffastandeasy,lowcreditinstalmentloans sinceour last study.These loansdiffer frompayday loans in that theyare typicallyrepayableoveralongerperiodoftime,withregularmonthlypayments.

Toestimatetheimpactofthesetypesof loansonconsumerinsolvenciesweidentifiedthethree largest lenders offering these types of loans as our indicator. Almost 5% ofinsolvenciesincludedatleastoneofthethreehighcostinstalmentloansweidentifiedasameasureofthisrisk,upfromjust1%twoyearsearlier.Theaverageeasyloanincreasedto$3,608from$2,199.

Theprevalenceoffastandeasyinstalmentloanshasincreased5foldsince our last study.Most insolventdebtorsareusing these types ofloansinadditionto,ratherthaninreplacementof,paydayloans.

Lenderspromotetheseloanstoindividualswhoneedaccesstofundsquicklyforexpenseslike a car purchase or home repair. Proponents promote them as a fast and faireralternativetopaydayloansanditistruethatthesetypesofinstalmentloansareprimarilyusedby thesamepeoplewho turn topayday loans. In fact,78%of thosewithoneofouridentifiedeasyinstalmentcreditorloansalsocarriedatleastonepaydayloan.Thisleadstotheconcernthatquickandeasyinstalmentloansarenotanalternativetopaydayloans,butratherareonemoresourceofcashforfinanciallystrugglingindividualsattemptingtoholdoutalittlewhilelonger.

VehicleLoanBankruptcyRiskRisesModerately

Auto loans inCanada are increasing at an average rate of 5.8%a year4.Whilewedonothave data on the term and types of vehicle financing used by insolvent debtors, we are

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concerned that the trend towards longer terms and loan rollovers is increasinglycontributingtothenumberofinsolvenciesinOntario.

Whileacar loanor leaseonitsownmaynotbesignificantenoughtocauseJoeDebtortobecomeinsolvent,highermonthlypaymentsandrepaircostsdocausecashflowproblems.Rather than risk repossession, JoeDebtor turns toother formsofdebt–credit cardsandpaydayorfastcashloans–tomeethismonthlyloanorleasepayment.

Wefoundthat46%ofallvehicleslistedbydebtorswereencumbered,upfrom43%inourpreviousstudy.Intotal,37%ofallestateslistedanencumberedvehicle.

Almosthalfofallvehicleslistedbydebtorswereencumberedwiththeaverageencumbranceequalto89%ofthecarvalue.Longertermandhigher cost car loans and loan rollovers create cash flow problemshandled with additional unsecured debt and increase the risk ofbankruptcyforheavilyindebtedindividuals.

Insolvent debtors were significantly more in debt due to vehicle financing than in ourprevious study. The average secured vehicle loan increased by 12% to $11,358 and, onaverage, vehicles are 89% financed at the time of insolvency. Comparatively, the averagevalueofanunencumberedvehicleincreasedbyonly2%. Inaddition,theratioofsecuredvehicledebttounsecureddebtincreasedto20%in2015from17%.

Asa reminder,debts to securedcar loansand leasesarenot included inabankruptcyorconsumerproposal.Debtorscancontinuewiththeirfinanceobligationsif theyareabletokeep upwith theirmonthly payments after filing ormay surrender the vehicle enablingthemtoeliminateanyunsecuredshortfallintheirinsolvencyproceeding.

UnsteadyIncomeLeadingToTaxDebt

TaxdebtscanincludeHST,sourcedeductionsorpersonalincometaxesowingtotheCanadaRevenueAgencyaswellaspropertytaxes.Individualsmaypostponeinstalmentpaymentsor property tax payments during times of financial difficulty, ormay incur additional taxliabilitiesdue to extra earned incomeorRRSPwithdrawals. As insolventdebtors clearlyexperienceacashflowshortfallduringthemonthsoryearsleadinguptotheirinsolvency,itisnotunexpectedthatmanywillowemoneyintaxes.Infact,42%ofallinsolventdebtorshavetaxdebts.Thosewhodo,owedanaverageof$21,907,upfrom$18,166.

Wehave found that the largest taxdebtobligationswereowedby self‐employeddebtorsandthoseovertheageof50.

Self‐employedand smallbusinessownersoweonaverage$33,767 in taxdebts includingincometaxandHST.Thesedebtsariseafterthefailuretomakeinstalmentpayments,oftenduringtimeswhencashflowisshortfromoperations.

4in10insolventdebtorscarryataxdebtandtheaverageoutstandingtaxliabilityincreased21%.Thepercentageoftax‐driveninsolvenciesinvolvingself‐employeddebtorsandseniorscontinuestoincrease.

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Moreover,mostself‐employeddebtorsaremale(68%).Onbalance,mostarestillworking(96% report being employed or in business), but report income 12% below that of theaverage JoeDebtor.Although these taxdebts arebusiness related, if the individual isnotincorporated,theyareconsideredpersonaldebtsandcanbeincludedineitheraconsumerproposal or bankruptcy. In 2015, 12% of all insolvencies were filed by self‐employeddebtors,upfrom10%in2013.

Seniors also owe a higher than average tax debt, even excluding seniors whowere self‐employed.Itisnotunusualforpensionerstofindthemselvesowingmoneyforthefirsttimeas a result of extrapart‐time incomeandRRSPwithdrawals, combinedwith the fact thattheirpensiondidnothaveenoughtaxwithheldatsource.

WomenMoreLikelyToStrugglewithStudentDebtRepayment

While thepercentageofdebtors carrying a student loan increasedonly slightly sinceourlaststudy,theiraveragestudentloandebtcontinuedtogrow.

Just over 13%of insolvent debtors had a student loan at the time of insolvency,with anaveragebalanceowingof$13,818,up4.3%.

As in prior years, insolvent student debtors are muchmore likely to be female. In fact, 60% of student loandebtors are female, but what is more concerning is thatfemale student debtors (Jane Student) are likely to owemuch more money than male student debtors (JoeStudent) at the timeof their insolvency.On average JaneStudent owed $14,748 – 19% more than her malecounterpart.

Jane’s student debts amounted to one‐third of her totalunsecured debts, compared to just 23% for Joe Student.From this we can confirm that, for the average female

studentdebtor, it isstudent loans thatare theprimary financialproblemcausingthemtofileforinsolvency.

6 in 10 student debtors are female. Unstable employment delaysstudentloanrepaymentforfemalestudentdebtors,increasingtheriskthattheywillneedtofileforinsolvency.

Interestingly,bothmaleand femalestudentdebtorsearneda similar income inour2015study. Jane Student earned on average $2,288, just slightly higher than $2,266 for JoeStudent.However,bothearnedlessthantheaverageJoeDebtor.Ingeneral,itistheinabilityto find employment at a pay level sufficient to repay increasing student loandebt that iscontributing to student debt insolvencies in Ontario, and this is true for both male andfemalegraduates.

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However,JaneStudenthasanaddedburden.SheismuchmorelikelythanJoeStudenttobeunemployedoroutofworkforotherreasonsincludingmaternityleave.Inour2015study,more than91%ofmalestudentdebtorswereemployed.Thiscontrastswithonly83%offemale studentsworking at the time of their insolvency. This lack of stable employmentmakes it increasinglydifficult forher tosupportherstudent loanpayments,orpaydownher debt sooner. That may explain why her overall student debts are higher than JoeStudent’s at the timeof insolvency, even though they are roughly the same age and earnaboutthesameincome.

MarginalizedByHigherThanAverageDebtServicingCosts

Low interest rates have continued to keep debt servicing costs affordable for mostCanadians.Unfortunatelythosewhoaredeepindebthavepoorcreditandarealltoooftenchoosinghighcostlendingproducts.

Thetypicalinsolventdebtorispayingablendedrateof19%ormoreperyearonalloftheirdebt:

JoeDebtor Debt InterestRatePaydayloans $499 548%

Fastinstalmentloans $163 59%

Otherpersonalloans $18,604 10%

Creditcarddebt $20,776 19%

Taxes $9,114 5%

Studentloans $1,849 10%

Otherdebts $5,540 25%

Blendedrate $56,545 19%

This means that Joe Debtor is spending roughly $889 a month on interest, an amountequivalenttoalmost37%ofhistake‐homepay.

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High interestcostsrelative to incomemake itdifficult tokeepupwithmonthlypaymentsand are one reason many people take on even more debt. A payday loan becomes aperceivednecessitytopaytherentormortgageattheendofthemonthwhenJoeDebtorhasusedupmostofhispaymakingminimumpayments.

Thisbeginsadownwardspiralofnotonlyadditionaldebt,but alsohigherdebt servicingcosts.Ouraveragepaydayloandebtorispayingablendeddebtservicingcostofmorethan56%onhistotalunsecureddebtof$35,799,oralmost$1,700amonth.Thatistheprimaryreason why the average payday lender owes a total of 3.5 payday loans and can easilyaccumulatedoubledigitloans.

ConsumerCredit&Insolvencies–What’sAheadWhile the pace of growth may haveslowed since our previous study,consumer credit is still on the rise inCanada.However,lowinterestrateshavemade the cost to carry this debt, for themost part, affordable. For Canadians notreliantonhighcostcreditoptionsandnotover‐extended on their mortgage andearning a stable income, their debt islargelymanageable.

This is why we have seen a significantdrop in the overall insolvency rate in

Ontariosincepeakingin2009.Infact,Ontarioconsumerfilesdropped7%inboth2013and2014,theyearsofourstudy.

Sotechnically,lesspeoplearefindingthemselvesinsolvent.TheinsolvencyrateinOntariohasbeenon thedeclinesincepeakingat6.6per1000persons18+ in20095. In2013 theratewas4.1,anditislikelythatthe2014ratewillbearound3.8per1000adults.

It is our expectation, however, that these numbers will not fall to the lows seen duringpreviouseconomiccyclesforseveralreasons:

1. Thecoreinsolvencyrateisbeingdrivenbyat‐risk households who are not justindebted, but are heavily indebted. Arecent report by the Bank of Canada6stated that about 12% of families havedebts greater than 250% of disposableincome. These are the same at‐riskdebtors we see every day, and as we’veseeninourstudyresults,theirriskfactorsintermsofcreditavailabilityandcashflowpressuresareincreasing.

2. Interestratesmaybeathistoricallows,allowingmoreCanadianstofocusonprincipalrepayment, however, at some point this protection is likely to disappear. Rates willincrease,andforsome,evenasmallincreasewillbecomeaproblem.

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3. Debtservicecostsmaybe low for theaveragedebtor,but for thosewithoutaccess togoodcredit,debtservicingcostsremainanissue.Theincreaseduseofhigh‐risk,high‐cost credit options like payday loans, fast and easy instalment loans and car loanrolloversresultsinanevenhighercostofdebtthancreditcarddebt.

4. Consumer proposals have now reached a criticalmass, enough tomake a significantimpact going forward. While bankruptcies have fallen continuously since 2009,consumerproposalshavebeenontherise.InOntario,over50%ofallinsolvencyfilingsarenowconsumerproposals.Thebenefitofaconsumerproposaloverotherdebtreliefalternatives for those severely burdened with debt, will continue to make this anattractiveoptiontodealwithdebt.

Lookingforward,itislikelythattheinsolvencyratewillstabilize,ifnotincreaseslightly,inthe short term. However, when the next recession arrives, we firmly expect that theinsolvencyratewillpeakevenhigherthanitdidin2009.

We began this study with a comment regarding the proliferation of consumer debtwarnings in themedia.Canadianshave to someextent chosen to tuneout themessage–perhapsundertheimpressionthatdebtadvisorslikeourselvesandthemediaaretooquicktoclaimthattheskyisfalling.Wecanseefromourstudyresultshowever,thatmuchofthecautionary concern around the growth in car loans, student debt and sub‐prime debtoptionsaretoday’sleadingdriversofover‐indebtedness,and,ofinsolvencyrates.

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DataTable1:JoeDebtorProfile–ByAgeGroup

ComparisonofDebtorsByAgeGroup

18‐29 30‐39 40‐49 50‐59 60+

%ofalldebtors 12% 29% 28% 20% 10%

PersonalInformation: Male 50% 52% 57% 55% 58%

Female 50% 48% 43% 45% 42%

Averageage 26 35 44 54 67

Maritalstatus

Married/Common‐law 28% 42% 41% 42% 45%

DivorcedorSeparated 10% 24% 34% 36% 29%

Widowed 0% 0% 1% 3% 14%

Single 62% 34% 24% 19% 12%

Averagefamilysize 1.9 2.6 2.5 1.9 1.5

Singlepersonhousehold 57% 37% 36% 48% 53%

Likelihoodofhavingdependant 35% 57% 56% 29% 7%

%LoneParent 17% 22% 25% 11% 3%

Averagemonthlyincome $1,996 $2,453 $2,656 $2,436 $2,215

Totalunsecureddebt $32,229 $49,437 $61,358 $68,493 $69,031

Unsecureddebt‐to‐income 135% 168% 193% 234% 260%

Likelihoodtheyownahome 10% 21% 30% 31% 25%

Averagemortgagevalue $166,146 $197,007 $207,295 $199,622 $172,174

DetailedInformationontheamountofaverageunsecureddebt:PersonalLoans $11,481 $18,288 $21,432 $21,945 $20,096

CreditCards $9,858 $15,245 $21,491 $28,006 $33,355

Taxes $3,030 $6,579 $10,765 $12,401 $12,571

StudentLoans $3,716 $3,023 $1,448 $458 $120

Other $4,144 $6,302 $6,222 $5,683 $2,889

Filedbankruptcy 54% 44% 41% 42% 51%

Filedconsumerproposal 46% 56% 59% 58% 49%

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DataTable2:JoeDebtorProfile–ByRiskGroup

ComparisonofDebtorsByRiskGroup

Male Female

StudentDebtor

Self‐Employed

Lone‐Parent

%ofalldebtors 54% 46% 13% 12% 18%

PersonalInformation: Male 40% 68% 25%

Female 60% 32% 75%


Maritalstatus



Widowed 1% 4% 1% 1% 3%

Single 27% 32% 45% 28% 30%




%LoneParent 8% 30% 25% 15% 100%

Averagemonthlyincome $2,546 $2,287 $2,279 $2,147 $2,869






CreditCards $23,355 $17,729 $12,208 $28,552 $16,006

Taxes $13,327 $4,138 $4,366 $33,767 $7,452

StudentLoans $1,234 $2,577 $13,818 $1,412 $2,678

Other $6,046 $4,940 $5,559 $9,240 $7,347



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DataTable3:JoeDebtorProfile–ByIncomeGroup

ComparisonofDebtorsByIncomeGroup

<=$1,000*

$1,001‐$2,000

$2,001‐$3,000

$3,001‐$4,000 $4,001+

%ofalldebtors 10% 27% 36% 18% 9%

PersonalInformation: Male 53% 48% 55% 57% 69%

Female 47% 52% 45% 43% 31%


Maritalstatus



Widowed 2% 3% 2% 3% 1%

Single 32% 35% 32% 21% 14%




%LoneParent 7% 11% 19% 30% 26%

Averagemonthlyincome $464 $1,595 $2,495 $3,441 $4,912






CreditCards $23,270 $18,920 $18,154 $22,264 $31,413

Taxes $12,464 $8,262 $5,766 $7,725 $24,336

StudentLoans $1,663 $2,123 $1,900 $1,761 $1,180

Other $4,728 $6,350 $4,622 $5,082 $8,575



*Statisticsfordebtorswithpersonalincomebelow$1,000includedebtorswhowereunemployedatthetimeoffilinganddonotnecessarilymatchtheirincomeprofilewhentheybecameindebted.

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References1. EquifaxCanada:http://rmanet.itoolpro.com/images/BNI%202%200%20‐

%20Customer%20Handbook.pdf

2. Our2013studyhasbeenrestatedtoreclassifycertaindebtsforconsistencyandtoremoveprimarilybusinessdebtinsolvenciestoimprovecomparisons.

3. StatisticsCanada:ConsumerCredit,SeasonallyAdjusted(Table176‐0032)calculatedonaperadult18+basisbasedonPopulation(Table051‐0001).Averagefor2013‐2014.

4. CanadianConsumerCreditTrends,Q42014:EquifaxAnalyticalServices

5. OfficeoftheSuperintendentofBankruptcyCanada:AnnualInsolvencyRates

6. BankofCanadaFinancialSystemReview,December2014.

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