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During 2013, almost 120,000 Canadians filed for bankruptcy relief or filed a consumer proposal.
While the number of personal bankruptcies fell by roughly 3%, the number of consumer proposals rose by almost 5.5%. This increase in the number of Canadians filing for some type of debt relief supports a long-term trend that has many worried about the growing number of Canadians whose debt is growing faster than their income.
According to a report by Statistics Canada, the Canadian debt ratio rose to 163.7% in the last quarter of 2013.
What this means in real world terms – – for every $1 earned by Canadians, they owe $1.64 in debt. Unfortunately, what this means for many Canadians is that they are living right on the edge and a small decrease in income can cause them to tumble into bankruptcy. Even for consumers who have job security, there are other reasons that may cause their financial problems to become overwhelming. When a consumer is unable to pay his or her debts, bankruptcy may be the only option available to end the debt problem.
Five reasons why Canadians file bankruptcy
If you are considering filing bankruptcy in order to resolve your debt problems, you should know that you are not alone. Many of your fellow Canadians are dealing with the stress caused by financial problems. Some debt problems are due to circumstances within the control of the person while some people find themselves in serious debt due to circumstances that are beyond their control.
Loss of income – When consumers experience a loss of income due to layoffs, reduced hours or a cut in pay, they can quickly find themselves in a situation where they are unable to pay their bills. Losing your job is very stressful; however, facing bill collectors and creditors simply adds to the stress. Many people find it impossible to make ends meet when they experience a reduction in income. Some borrow money from one account to pay other accounts or borrow money to pay for basic living needs. Even those who have an emergency fund find themselves facing these issues if they are unable to find another job or increase their income. Job loss is reported as one of the top reasons for filing bankruptcy in Canada.
Medical expenses – Even though Canada has a government funded healthcare system, not all medical expenses are covered by healthcare or insurance. Therefore, a serious medical condition or injury can quickly result in the inability to pay bills. For individuals who require a lengthy hospital stay or who need physical therapy, their medical bills and regular bills can quickly become overwhelming. It can get much worse if the individual is unable to return to work and disability income is rarely sufficient to pay for both living expenses and debt repayment.
Loss of a spouse or divorce – This is another top reason why Canadians file bankruptcy. In addition to the emotional devastation experienced by someone who has lost a spouse or who is going through a divorce, the financial aspect can also be devastating. If an individual has not prepared for his or her death, the surviving spouse is left trying to pay for the expenses of a funeral as well as paying living expenses and bills on one income. Likewise, a divorce leaves both spouses struggling to pay bills with only one income in addition to paying attorney’s fees and costs for the divorce.
Lack of proper financial management – Some individuals do not make wise money management decisions. They overspend, live above their means and fail to budget their income. The use of credit cards for immediate gratification often causes individuals to get in over their heads in debt. Any slight decrease in income will cause a major financial crisis.
Catastrophic event or disaster – This is an event that is completely out of the control of the individual and no amount of planning would have prevented the financial crisis caused by the event. Home fires, floods, major car repairs, sudden medical emergencies or the death of a loved one are only a few of the things that can happen to all of us. When faced with an emergency, if the person does not have sufficient savings, he or she can easily become overwhelmed with debt.
Options for resolving debt problems
In Canada, the two most common ways to solve debt problems are by filing a personal bankruptcy or filing a consumer proposal. Both have distinct advantages and disadvantages. For example, creditors must accept the consumer proposal for it to be valid whereas a personal bankruptcy is immediate financial relief. However, in a personal bankruptcy, you may be required to surrender certain assets in order to get rid of your debt whereas with a consumer proposal, you can retain your assets. You must also surrender your tax refunds with a personal bankruptcy.
A consumer proposal will not hurt your credit rating as severely as filing a personal bankruptcy. A consumer proposal results in an R7 credit rating whereas a personal bankruptcy carries an R9 credit rating. Finally, if you file a personal bankruptcy, you must file monthly budgets that are not required when you file a consumer proposal.
Author Bio : Brian P. Doyle is the President and co-founder of Doyle Salewski Inc., a licensed trustees in bankruptcy.