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Consumer Trends Report - Chapter 7: Consumer Debt

Chapter 7 — Consumer Debt

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Analyzing trends in debt is important for a number of reasons. Debt has a substantial impact on the balance sheet of households. Public opinion data suggest that many Canadians experience anxiety about their debts, and that paying them off is a priority for many consumers. For example, a 2003 national poll revealed that slightly less than a third of Canadians are concerned about being able to manage their current level of indebtedness,202 and another 2003 poll indicated that more than three quarters (77 percent) of Canadians feel that "paying down debt, such as a mortgage or other loans" is a very important financial goal.203

This chapter examines general trends in consumer debt. The use of credit cards is briefly examined, as are alternative sources of consumer financing. Finally, trends in consumer bankruptcy are presented.

7.1 General Trends in Debt

Consumers are carrying more debt

Data from the Survey of Financial Security (SFS)204 reveal that, when comparing 1984 to 1999, the percentage of Canadian family units with debt remained unchanged at 70 percent (see Figure 7.1). However, the aggregate amount of debt slightly more than doubled in real terms over this time, increasing from $207 billion to $458 billion. Therefore, the median debt of family units increased from $12 567 to $29 000.205

Figure 7.1 – Median Debts: 1984 versus 1999, All Family Units*
(Medians Based on Those Reporting Ownership, $1999)
  1984 1999
Median ($) % Reporting Median ($) % Reporting

Note: No adjustments are made to 1999 data as all components are comparable to 1984 data. Furthermore, unlike average values, median values are non-additive, i.e., the sum of the individual categories does not equal the total.

*All family units include both economic families and unattached individuals. Back to text

**Other debt includes vehicle loans, lines of credit, and other amounts owing on loans from financial institutions, unpaid bills, etc. For comparison purposes, these components were aggregated for the 1999 data, to reflect the format of the data available for 1984. Back to text

Source: Statistics Canada, SFS, custom tabulations.

Mortgages 42 372 31 69 000 36
Principal Residence 38 315 30 67 000 34
Other Real Estate 22 989 7 60 000 5
Credit Card and Instalment Debt 766 46 1 800 40
Student Loans 3 372 5 7 280 12
Other Debt** 6 437 40 8 200 43
Total Debt 12 567 70 29 000 70
Number of Family Units
(Millions)
9.50 12.22

What is implied by the concept of over-indebtedness?

As the issue of consumer over-indebtedness receives growing attention in Canada and other developed economies, the number of ways of measuring it has multiplied: total debt as a percentage of income, consumer credit as a percentage of consumer durables, debt as a percentage of total assets, etc. Research on this subject has concluded that "there was no generally accepted definition of over-indebtedness and inadequate information on which to base one" (U.K. Task Force on Tackling Over-indebtedness, 2003, 12). On the basis of research carried out for the U.K. Department of Trade and Industry, a set of general indicators has been proposed to represent, at a minimum, a reasonable guideline for raising concerns about a household's risk of getting into financial difficulties:

  • having four or more current credit commitments;
  • spending more than 25 percent of gross income on consumer credit;
  • spending more than 50 percent of gross income on consumer credit and mortgages (U.K. Task Force on Tackling Over-indebtedness, 2003).

Over-indebtedness is a multi-faceted issue. A single set of indicators is not likely to be sufficient to assist in fully delineating and understanding it, so more research is required. For example, the interplay of consumer over-indebtedness and the practices, role and interests of the credit-granting industry should be considered, given that "A candid definition of the problem requires recognition that, in the absence of more of a social safety net, the only way to reduce over-indebtedness is for individuals to save more and borrow less, which would mean reduced volume for the consumer credit industry and reduced consumption, with attendant ripple effects in the economy" (Braucher 1999, 160).

By itself, debt does not provide a general indication of either financial stress or the ability to manage financial affairs. Other statistics, however, indicate that consumers are more leveraged than they have ever been. For example, the debt-to-asset ratio increased from 14.4 percent in 1984 to 17.6 percent in 1999. Also, recall from Chapter 1 that the debt-to-income ratio increased from 73.8 percent in the first quarter of 1989 to 103.2 percent in the last quarter of 2003 and that the savings rate declined from 14.1 percent to 1.3 percent over this period. According to a 2004 report, the level of debt taken on by some Canadians is worrisome:

…rising home valuations, and more recently higher stock prices, are boosting household net worth, thereby helping to insulate borrowers from the ongoing rise in indebtedness. Nevertheless, alternative measures of savings and liquidity have continued to weaken, suggesting that the financial cushion supporting households is probably inadequate to protect against a sustained rise in interest rates or a severe correction in the housing market (Scotiabank 2004).

When discussing debt, most analysts make a clear distinction between secured mortgages and unsecured debts, such as credit card and instalment debt. While mortgage debt is much more significant in absolute terms (it accounted for approximately three quarters of total outstanding debt in 1984 and in 1999), it is backed by an asset that tends to appreciate over time. Most forms of unsecured debt are not backed by such an asset (or are backed by ones that depreciate over time), and so, these forms of credit often represent "pure" debt.

Secured debt: mortgages

Not surprisingly, in 1984 and in 1999, mortgages by far represented the largest median debt of family units ($38 315 and $67 000 respectively). The increase in mortgage debt is not in itself a troubling issue, however, since housing equity also increased at the same time. For example, the net total outstanding equity (the value of all principal residences minus the amounts owed on them) in Canada was approximately $800 billion in 1999 (or $65 453 per Canadian family unit), compared to $483 billion (or $50 846 per Canadian family unit206) in 1984 (see Figure 7.2). However, as we shall see, for some consumers meeting mortgage payments can be a significant issue.

Figure 7.2– Aggregate Data on Principal Residence: 1984 and 1999 in $Millions, 1999 Dollars
1984 1999 Annual
Growth

Note: No adjustments are made to 1999 data as they are directly comparable to 1984 data.

Source: Statistics Canada, SFS, custom tabulations.

Value of Home 605 194 1 103 740 4.1%
Outstanding Mortgage 122 155 303 901 6.3%
Total Equity 483 039 799 839 3.4%
Number of Family Units (Millions) 9.50 12.22 1.7%

Several factors identified in earlier chapters have created positive circumstances for buying a home in Canada over the last decade, such as low interest rates (see Chapter 1) and strong income growth (see Chapter 5). As well, some legislative changes and private market practices were introduced during this period that have encouraged some people to take on more debt than was once possible when buying a home. For example, the Government of Canada introduced the First Home Loan Insurance Program in 1992, which reduced the minimum down payment on a home (subject to certain conditions) from 10 percent to 5 percent for first-time home buyers (Parliament of Canada 1995, 4). In 1998, this program was made permanent and the 5 percent down payment threshold was expanded to include all home buyers. According to the Canada Mortgage and Housing Corporation, 70 percent of first-time home buyers between 1992 and 1997 would have been unable to purchase their home without the 5 percent down payment option (CMHC 1998). Furthermore, many lenders have recently introduced products that effectively allow consumers to borrow against 100 percent of the value of a home.207 This option was also made available by the CMHC in March 2004 (CMHC 2004).

Also in 1992, the federal government introduced the Home Buyers' Plan (HBP), which allows eligible first-time home buyers to withdraw up to $20 000 (or $40 000 for an eligible couple) from their Registered Retirement Savings Plans (RRSPs) to be used against a down payment and closing costs for a home. RRSPs withdrawn under this program must be paid back in equal instalments over a 15-year period. SFS data reveal that those taking advantage of this program are mainly middle-income and lower-middle income family units. While family units in the top income quintile are the most likely to have ever owned an RRSP, family units in the middle income quintile and second lowest quintile are the most likely to report ever withdrawing an RRSP under the HBP (11.2 percent and 8.5 percent, respectively).208 However, a Statistics Canada report notes that:

The effect of this program HBP on the housing market is virtually impossible to determine. No doubt, many participants would have otherwise been unable to purchase a home. Others may have had sufficient resources, but decided to increase their down payment and reduce their outstanding mortgages (Frenken 1998, 38).

Some evidence suggests that homeowners are increasingly likely to experience financial difficulties. Statistics Canada reports that, in 1995, 78 000 (of 229 000) Canadians obligated to make repayments to their RRSP under the HBP failed to do so, with the majority of these people (76 000) making no repayment at all.209 The implications for these consumers are serious: they incur an immediate tax liability, at their current tax rate, and they lose that non-recovered RRSP as a future source of retirement income.

Another example of certain financial difficulties that homeowners can face can be found in Hydro-Québec data. Hydro-Québec studies clients' payment patterns, along with whether they own or rent their homes. This information revealed a recent upward trend in the percentage of new client homeowners who have had their files downgraded.210 This percentage of homeowners grew substantially between 2000 and 2002, increasing from 27 to 50 percent. Furthermore, considering all clients of Hydro-Québec (not only new clients), there has been an increase in the proportion of homeowners having files requiring action against them (e.g. collections), an even more serious indication of poor payment performance. Also, homeowners (when compared to renters) accounted for only 11 percent of files requiring action in 2000. This almost doubled (to 21 percent) by 2002. Finally, Hydro-Québec data reveal that 4 percent of new client homeowners closed their accounts in 2000, and this proportion increased to 8 percent in 2002. This suggests that new client homeowners in Quebec may be increasingly returning to renting after a period as homeowners, or they are finding a way to make a profit by turning housing units over quickly.

Unsecured credit: Key definitions

Aggregate data on unsecured debt presented in this chapter examine two forms – lines of credit and credit cards – as particular instances of the changing use of consumer credit. Data provided by Equifax Canada capture instalment loans (i.e. bank loans, finance company loans, automotive sales finance loans) and revolving loans (i.e. national credit cards, department store cards, other retail cards and other revolving credit). Equifax information includes both credit limits (i.e. credit made available by lenders) and credit used (reflecting outstanding balances, i.e., actual debt incurred by consumers).

Unsecured debt: consumer credit

Over the 1992 to 2002 period, average (real) outstanding consumer debt per adult Canadian grew at an average annual rate of 9.3 percent. As a broad comparison, national accounts data reveal that disposable income grew at an average annual rate of only 3.7 percent over this same period.211 The (real) average credit limit per adult Canadian grew at an even faster rate of 10.2 percent (see Figure 7.3).

Figure 7.3

Average Credit Limit and Outstanding Consumer Debt* per Adult Canadian (18+), 1992, 1997 and 2002

* Excluding mortgages.

Source: Data obtained from Equifax Canada.

Credit ratings explained

Data provided to the Office of Consumer Affairs (OCA) by Equifax Canada are based on a random sample of active tradelines (active in the past 12 months) in Equifax's database. Each financial obligation incurred by a consumer (e.g. a bank loan, a credit card transaction) is recorded as a separate tradeline. Each bit of credit history in an Equifax credit file is assigned a credit rating by the credit grantor.212

The unit of analysis is therefore the credit product (e.g. credit cards) and not individual consumers. It can be quite difficult to categorize consumers by a single credit rating, since it is possible for a person to have several credit products, each with different credit ratings. Consequently, while this level of analysis provides important insights about the growth in the availability and use of credit in Canada, and about how well or how poorly debts are being serviced, it cannot be easily interpreted to tell us how different consumers deal with their entire debt load.

OCA obtained tradeline data broken down by North American Standard Account Rating, and has grouped the data in the following categories, also used by Equifax:

"Good" credit ratings

"Minor Delinquent" credit ratings

"Serious Delinquent" credit ratings

"Serious Delinquent; Action Taken" credit ratings

See the Appendix for definitions of these credit ratings.

This 10-year period also shows interesting trends over the business cycle.213 An analysis of the data reveals an overall improvement in the credit ratings of the range of financial products (included in Equifax reports) held by Canadians between 1992 and 2002. Comparing those two years, the proportion of financial products (called "tradelines" in the Equifax data) with a "good" credit rating (those for which the minimum required payment was made within 30 days of the due date) increased from 93.1 percent to 96.4 percent.214 On the other hand, the proportion rated "minor delinquent" and "serious delinquent" fell, while those rated "serious delinquent; action taken" remained unchanged (at 1.4 percent).

More consumer credit is available

In part because there are more of them in absolute numbers and they represent a greater proportion of total tradelines, credit products with a "good" rating have grown the fastest in terms of the total credit available in Canada.215 Another factor, however, is behind this trend: the (real) average credit limit per product (tradeline) has also increased, from $4384 in 1992 to $9114 in 2002 (see Figure 7.4). As for those products rated minor or serious delinquent, while they have declined in absolute numbers and now represent a smaller proportion of total tradelines than in 1992, the credit products in those categories are today, on average, carrying a higher credit limit. Finally, products with the worst rating have seen little change in their average credit limit.

Figure 7.4

Average Annual Credit Limit per Tradeline by Credit Rating, 1992, 1997 and 2002

Source: Data obtained from Equifax Canada.

A number of factors may be affecting the growth in the number of credit products and credit limits for tradelines with a good rating, and in the credit limits of some delinquent products. Anecdotal evidence from industry observers suggests that, as competition in all aspects of the financial services marketplace has increased over the last several years, lenders in general have been reaching out to borrowers with potentially higher credit risks. Another contributing factor may be that the level of lending sophistication has increased with greater access to and use of credit/financial behaviour data. From the consumer perspective, the additional financial flexibility may be welcomed to cushion against hard times – but for some this may imply a greater risk of accumulating more debt, resulting in more stress in managing their finances.

Use of credit has changed

In terms of consumers' behaviour with respect to debt, it is also interesting to complement information on credit limits with the actual use of credit. Comparing 1992 to 2002, the proportion of credit used (the aggregate outstanding balance divided by the aggregate credit limit) marginally declined for credit products with a "good" credit rating216 (see Figure 7.5). Conversely, the proportion of credit used in all delinquent categories increased over the decade, with the greatest gains in the worst credit ratings. It is worth noting that some researchers have suggested a correlation between the increasingly easy availability of large amounts of credit with consumer bankruptcies (see Section 7.2, Trends in Consumer Bankruptcies).

Figure 7.5

Proportion of Credit Limit Used, by Credit Rating, 1992, 1997 and 2002

Source: Data obtained from Equifax Canada.

The personal line of credit

An important trend that emerged over the 1990s is the increasing use of personal lines of credit by Canadian consumers. Public opinion data reveal that the percentage of adult Canadians who reported having a line of credit nearly tripled between 1993 and 2003, increasing from 16 percent to 43 percent (Millward Brown Goldfarb 2003, 7-17). Furthermore, Bank of Canada data show that since 1997 the growth in balances associated with personal lines of credit has far exceeded the growth of other types of credit products217 (see Figure 7.6). This, among other factors, suggests that many consumers are taking advantage of the lower interest rates offered on this form of credit.

Figure 7.6

Selected Chartered Bank Assets, 1984-2003

Note: Last data point is November 2003.

Source: Statistics Canada, CANSIM, series v36867, v36868 and v36869.

The requirements for getting a personal line of credit are generally much more strict than for more expensive forms of credit, such as a credit card. Consequently, some consumers may be unable to take advantage of the lower interest rates offered by personal lines of credit. In addition to those who may be unable to access lower rates, some consumers may simply have not actively investigated cheaper alternatives to managing their current debts. This appears to be supported by 2003 public opinion data: 46 percent of Canadians 25 to 64 years of age (who are the main or joint decision maker of the household) reported that they had not structured their debt so that they could pay the lowest possible amount of interest (Ipsos-Reid 2003c).

Credit cards

According to the Canadian Bankers Association (CBA), over the past two decades the number of personal and business credit cards in circulation has increased fivefold, from 10.8 million cards in 1980 to 50.4 million cards as of the end of the 2003 fiscal year (CBA 2003). Comparing these figures to the adult (18+) population, this represents an increase from an average of 0.62 credit cards per adult Canadian in 1980 to 2.05 cards in 2003.218 However, data from the SFS reveal that while Canadians are, on average, using more credit cards, the percentage reporting credit card debt (including deferred or instalment plan payment) has decreased (see Figure 7.1).

Data provided by Equifax Canada demonstrate that the growing number of credit cards in circulation has greatly increased the amount of credit available to consumers. The real219 aggregate outstanding credit limit available on credit cards increased from $73 billion in 1992 to $199.8 billion in 2002. On an adult per capita basis, this is an increase from a real average credit card limit of $3418 in 1992 to $8204 in 2002.

Equifax Canada data can also be used to analyze credit card trends by credit rating. First, regardless of the business cycle, a large majority of active credit cards are consistently classified with a "Good" credit rating (97.1 percent in 2002, up from 95.6 percent in 1992). Second, in terms of average credit limit per card, Equifax data show that it generally increased for all ratings. Furthermore, for credit cards with the worst rating, consumers are using up a significantly greater share of the credit available. More specifically, the percentage of credit used with "Serious Delinquent, Action Taken" credit cards increased from 74.3 percent (of an average $2779 limit, in 2002 dollars) in 1992 to 89 percent (of an average $3600 limit) in 2002 (while remaining relatively stable for credit cards with the best rating) (see Figure 7.7). All ratings combined, the average credit used per credit card (tradeline) increased from $796 in 1992 to $1553 in 2002.

Figure 7.7

Average Balance and Unused Credit per Credit Card by Credit Rating, 1992-2002

Source: Data obtained from Equifax Canada.

The rise in the use of credit, particularly with respect to cards with the worst credit rating, is likely interrelated to the trend of rising bankruptcies (see Section 7.2, Trends in Consumer Bankruptcies). Anecdotal evidence suggests it is not uncommon, leading up to bankruptcy filing, to see an overall increase in a person's use of credit, in parallel with their increasing delinquency.

Some research suggests that credit cards can be a "lender of last resort" when times get tough financially (Chmiel 2002, 9). When asked why they do not pay off their credit card balance completely each month, 50 percent of consumers who report sometimes, or usually, carrying a credit card balance say they use their credit card to cover one-time expenses (such as a car repair or replacing a broken appliance), and 13 percent reported using it to pay for things they needed regularly, such as food and rent.220 This was especially true for consumers in the lowest household income category (less than $20 000 a year), one third of whom reported carrying a credit card balance to meet basic expenditures.

The survey data suggest that some consumers may indeed be using their credit cards, a fairly expensive form of credit, as a source of "emergency funds" and probably have relatively little liquid capital (and/or other options for borrowing). A lack of financing options in the case of emergencies may be particularly difficult to manage for consumers who have moved into the worst credit rating, as their unused credit on cards declined from $715 in 1992 to $395 in 2002.221

While consumers are increasingly acquiring and using credit cards, there are also some concerns about their level of knowledge of the terms and conditions associated with them. A 1997 survey of consumers' credit card usage reported that:

Canadians love credit cards, and rely on them constantly, but they think they know more about credit cards than they do. … Despite their good intentions, Canadian credit cardholders don't know the basics about their own cards, including essential information such as how to calculate interest charges, the length of their grace period or the annual fees they may be paying (CardTrak Online 1997).

For example, the survey found that 58 percent of cardholders did not know the interest rate they were paying on the card they used most often,222 28 percent did not know their card's annual fee, and four in ten did not know the number of days in their card's grace period.223 With the majority of consumers unaware of their credit card interest rate, it is not surprising another survey revealed that approximately one third (34 percent) of those carrying a balance on their credit card stated they did this simply because they found it a "convenient method to borrow" for things they wanted.224

Some consumers have trouble getting a credit card

The SFS data reveal that, in 1999, roughly 2.7 million households (or 21.8 percent) did not have a credit card.225 Only a small percentage (17.2 percent) of those households, however, reported being turned down for this type of credit. But of those who were denied access to a credit card, nearly two thirds (65.7 percent) were in the lowest income quintile and more than a fifth (21.9 percent) were in the second lowest income quintile. Due to their inability to get a credit card, these households may face particular challenges in purchasing some services. Renting a car, for example, may be very difficult to do without a credit card.

These concerns about consumers' knowledge of the products should also be considered in light of the fact that the CBA reports that cash advances on credit cards (which accrue interest immediately upon receipt of the funds) have grown at a staggering pace over the last two decades. Cash advances increased from $180 million in 1984 to $21.7 billion in 2003. While the CBA data include personal and business credit cards, and the figures are in nominal terms, there is clear evidence of the trend toward increasing use of cash advances by consumers.

A recent study of consumer bankruptcies noted that most included credit card debt and that "credit cards are being used by a larger, more diverse group of people. This wider distribution means that lenders are reaching out to borrowers with higher credit risks" (Chmiel 2002, 31). It also noted a strong correlation between personal bankruptcies and cash advances on credit cards, and that:

People experiencing financial stress may use cash advances as a substitute for income they have lost. There are no restrictions on what the money is used for (groceries, paying the rent, paying off other creditors, etc.), nor do they have to "apply" for them. They are already qualified by being a cardholder (Chmiel 2002, 32).

Alternative financing

Alternative financing includes services such as payday loans, pawnbroker services, rent-to-own operations and cheque cashing. These services are some of the most expensive ways for consumers to borrow; for example, when stated on an annual percentage rate (APR) basis, a typical payday loan is between 390 percent to 650 percent (Ramsay 2000). Anecdotal evidence suggests this sector is growing in Canada. For example, a 2000 report states that revenue from Canada's largest rent-to-own company (operating stores across Canada) increased from $422 000 in 1992 to $56 million in 1997, and that the number of pawnbrokers listed in a Toronto business directory doubled between 1996 and 1999, with a similar pattern in Northern Ontario (Ramsay 2000, vi and 44). Furthermore, a prominent provider of payday loan and cheque-cashing services indicated that its number of franchised and corporate branches increased from 100 in 1994 to 200 in 2000, and was currently approaching 300 (Money Mart 2003).

In a detailed study of the alternative financial sector (AFS), the Public Interest Advocacy Centre (PIAC) found that the demographic characteristics of those using such services did not differ markedly from those of the general population (Lott and Grant 2002, 38). PIAC concluded that this sector was not strictly catering to the poor, and estimated that only 15 percent of AFS customers would fall under Statistics Canada's (before-tax) low income cut-off.226 Focus group tests revealed that the AFS could generally be divided into two groups of customers: those who used the service because of their poor credit rating, and those who had other options but preferred AFS services for a variety of reasons, such as confidentiality, friendly service, or convenient hours (Lott and Grant 2002, 40). The data also revealed that "a basic lack of financial literacy was leading customers to place less emphasis on the cost of alternative financial services and more on other factors" (Lott and Grant 2002, 43).

Conversely, a study examining the AFS in Winnipeg's North End found that the growth of this market was in part related to insufficient access to traditional banking services. The report states that factors correlated with the use of alternative financial services include limited access to mainstream institutions and products. For example, the report notes that a number of traditional bank branches have shut down in the North End of Winnipeg, presenting difficulties for residents in the area who rely on public transportation (Buckland and Martin 2003, vi). The report also notes that persons who used cheque-cashing services often said they did so because they were unable to obtain credit cards or other personal loans from mainstream banks because they had a poor credit rating (Buckland and Martin 2003, 30).

Research opportunities

Further research into the financial situation and debt management of new homebuyers would add to our understanding of this group of consumers, particularly given the ever-shrinking down payment needed to enter the housing market. Questions that could be addressed include: Are new homeowners taking out mortgages they can afford? What proportion of homeowners across Canada return to renting as a result of encountering financial difficulties shortly after buying a home? In a context where much media attention is given to historically low mortgage rates as a good time to purchase a home, are consumers underestimating the non-mortgage costs of home ownership; for example, "set-up" costs, municipal taxes, general repairs and utilities?

Given the general level of consumer indebtedness, research could investigate Canadians' vulnerability to interest rate fluctuations. How would an increase in the interest rate affect current homeowners with mortgages? What impact might this have on consumers carrying unsecured debt? More broadly, more work would also need to be done on defining the multifaceted concept of over-indebtedness. Such an undertaking would require gaining a better understanding of credit granting and scoring.

Finally, research should also be geared towards assessing the financial choices of poor Canadians. For example, are there effective mechanisms available to them for accumulating retirement savings? How difficult is it for these consumers to get financial information? What influences their financial decision making: income; education and skills; or other factors?

7.2 Trends in Consumer Bankruptcies

An examination of consumer bankruptcy data over the past 20 years reveals two basic trends: the occurrence of bankruptcies is both cyclical and on a long-term upward trend (see Figure 7.8). The cyclical aspect is evident as consumer bankruptcies increased during the recessions of the early 1980s and early 1990s, and were followed by decreases when the economy improved. It is interesting to note, however, the slight increase in consumer bankruptcies between 1999 and 2002, a buoyant period. Also evident is the general upward trend: the average number of consumer bankruptcies in the 1990s (65 396) was more than two-and-a-half times greater than in the previous decade (24 447). Furthermore, the peak for consumer bankruptcies during the 1980s (30 693 during the recession of 1982) was lower than the trough for consumer bankruptcies during the 1990s (42 782 consumer bankruptcies in 1990).

Figure 7.8

Total Consumer Bankruptcies and Bankruptcies per 1000 Adult (18+) Population, 1980-2002

Source: Industry Canada, Office of the Superintendent of Bankruptcy (consumer bankruptcies) and Statistics Canada, CANSIM, series v466677 (population).

A 2001 survey among 800 Canadians who had declared bankruptcy over the 1996–98 period compared the profile of these ex-bankrupts with that of the general Canadian population (Léger Marketing 2002). It revealed that the ex-bankrupts:

  • were proportionately more in their prime working-age years (60.9 percent of ex-bankrupts were aged 31 to 50 and 9.8 percent aged 30 and under, compared to 41.6 percent and 21.1 percent, respectively, for the general Canadian population);
  • had achieved lower levels of education (only 17.5 percent of ex-bankrupts had completed university, compared to 27.2 percent of the general Canadian population);
  • had lower household income (more than three quarters earned less than $40 000, compared to 33 percent of the general Canadian population); and
  • were more likely to have one or more dependants (58.7 percent compared to 47.2 percent).

These results parallel some of the findings reported in a 1996 article:

…the available evidence shows that consumer bankrupts belong primarily to low and lower income groups with negligible or no discretionary incomes, that they are encumbered with very heavy debt burdens (in relation to their resources) which they would not be able to pay off over any reasonable period of time, and are subject to significantly higher levels of unemployment than the general population (Ziegel et al. 1996, 81–82).

A related study notes that, in general, people who file for bankruptcy do not voluntarily work less. Rather, many of these people are employed only part time (especially during the time leading up to bankruptcy), and many have jobs with relatively low pay (Chmiel 2002, 18).

According to ex-bankrupts, two of the main reasons having led them to bankruptcy (each reported by about a third of ex-bankrupts)227 were a change in their financial situation (such as a separation or a divorce, the loss of employment, health problems or a decrease in income) and an insufficient salary. Poor financial management was a third reason, reported by 17.7 percent of ex-bankrupts (Léger Marketing 2002).

As for the long-term increase in bankruptcies, it is not well understood or easily explained. A range of potential factors has been cited, such as:

the proliferation of credit card usage, the rising costs of post-secondary education and downsizing at large corporations. Others include changes in both legislation and social attitudes towards bankruptcy, as well as rising divorce rates (O'Neill 1998, 1).

It remains, however, that "the incidence of consumer bankruptcies between the 1980s and 1990s … has occurred despite changes to the bankruptcy legislation, which was designed to lower the incidence of consumer bankruptcies" (O'Neill 1998, 1). Furthermore, while the Bank of Montreal did conclude that the rising divorce rate was a statistically significant variable in the consumer bankruptcy picture, it also noted that this did not in itself explain the sharp change in the data, that is, the large increase in consumer bankruptcies beginning in the early 1990s (O'Neill 1998, 7).

Rising debt loads: A shared responsibility?

A recent public opinion poll listed a number of potential explanations for the trend towards increasing debt, and asked Canadians whether or not they agreed with each factor. Interestingly, two factors that Canadians tend to associate most with increasing debt are easier access to credit (86 percent of those polled agreed this was a contributing factor); and a lack of financial/budgeting skills (82 percent).228 These data suggest that Canadians view consumer debt issues as a shared responsibility: they recognize a personal responsibility for maintaining one's finances, but they also feel that financial lenders have a role to play in ensuring that the credit extended is manageable.

As for the impacts of marketplace changes on bankruptcy rates, recent analysis is unfortunately not available, but a comprehensive, early 1980s study of consumer bankruptcies in Canada concluded that "in many cases of bankruptcy, the consumer's access to more credit should have been restricted earlier" (Brighton and Connidis 1982, 85).

It therefore appears that a complex interaction of factors is at play when it comes to bankruptcy trends.

Research opportunities

Research to date has been insufficient to explain the strong upward trend in consumer bankruptcies that began in the early 1990s. Further research could examine the effect of a number of variables on consumer bankruptcy, such as the expansion of consumer credit, and the dissolution of family units (i.e. divorce/separation). It may also be interesting to examine whether there has been, in fact, an attitudinal shift in Canadian society towards bankruptcy, as suggested by some preliminary public opinion research (Industry Canada 1997).


202 Debt was defined as credit card balances, lines of credit, loans and mortgage payments. Source: Ipsos-Reid 2003a. Back to text

203 On a list of five financial goals, paying down debt was rated the most important. Source: Ipsos-Reid 2003b. Back to text

204 See the text box at the beginning of Chapter 6 for a description of the Survey of Financial Security. Back to text

205 For both 1984 and 1999, the median value presented is based only on those Canadians reporting debt, i.e., those who are debt free are excluded from the calculation. Back to text

206 This figure represents the average net equity for all Canadian family units (based on Figure 7.2). Therefore, it cannot be directly compared to information in Figure 7.1, which is based on median values per reporting household. Back to text

207 For example, see Canada NewsWire 2003 and CanEquity 2004. Back to text

208 This compares with 4.3 percent and 6.8 percent for family units in the top and second highest income quintiles, respectively. Due to small sample sizes, data are suppressed for family units in the lowest income quintile. Source: Statistics Canada, SFS, custom tabulations. Back to text

209 Also, preliminary data suggested a similar default rate for 1996 (Frenken 1998, 39). Back to text

210 A new Hydro-Québec client (a new account set up within the past 12 months) is assigned a neutral rating. A downgraded file is a very broad measure that indicates a less than perfect payment history. Back to text

211 Source: Statistics Canada, CANSIM, series v647037. Back to text

212 A credit rating (which is assigned to each tradeline) should not be confused with a credit score (which is based on a consumer's credit file). A credit score "is a numeric value assigned by credit grantors to indicate how likely someone is to pay back a loan or credit card according to the agreed repayment terms. It is an indicator of the level of risk that a borrower might represent. It is used as a predictor of future performance." Source: Equifax Canada 2003. Back to text

213 Very generally, 1992 represents a good approximation of a business cycle trough, 1997 is a good example of a year of transition (i.e. towards a recovery) and 2002 is an example of a year following sustained economic growth. Back to text

214 These figures include credit that is too new to rate. Back to text

215 Between 1992 and 2002, the total credit available (aggregate value of credit limits) in Canada is estimated to have grown (in real terms) by 12 percent for credit products with a good rating. This compares to -2 percent in the case of tradelines classified as "minor delinquent," +1 percent for serious delinquent and +4 percent for serious delinquent with action taken. Back to text

216 Since the focus is on the proportion, the calculations are based on nominal balances. Back to text

217 Data from the Bank of Canada relate to the value of all personal lines of credit as part of chartered banks' assets – not all such lines of credit are necessarily for consumer activities. Back to text

218 Source of population data: CANSIM, series v466677. Back to text

219 Figures are based on constant 2002 dollars, adjusted by the all-items CPI. Back to text

220 Note that this question was aided (correspondents picked from a list of choices). Question commissioned by the Office of Consumer Affairs for the Environics Research Group's Focus Canada survey (2003, first quarter). Back to text

221 These figures are presented in 2002 dollars. Back to text

222 Note that results are for all cardholders; results limited to only those cardholders who carry a balance on their card were not presented. Some cardholders may be unaware of the interest rate because they pay off their full balance each month, so the interest rate is largely irrelevant to them. Back to text

223 See CardTrak Online 1997. Back to text

224 Question commissioned by the Office of Consumer Affairs for the Environics Research Group's Focus Canada survey (2003, first quarter). Back to text

225 Statistics Canada, SFS, custom tabulations. Back to text

226 PIAC noted one exception to this result, saying that the pawnshop sector more correctly fits the characterization of a business "preying on the poor." Source: Lott and Grant 2002, 38. Back to text

227 Respondents could identify up to three responses. Back to text

228 These figures compare to: social pressure to spend (72 percent); need to borrow to cover essentials (68 percent); and low interest rates (66 percent). Question commissioned by the Office of Consumer Affairs for the Environics Research Group's Focus Canada survey (March 2003). Back to text

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